Question

Paul Bowlin owns and operates a tree removal, pruning, and spraying business in a metropolitan area with a population of approximately 200,000. The business has grown to the point where Bowlin uses one and sometimes two crews, with four or five employees on each crew. Pricing has always been an important tool in gaining business but Bowlin realizes that there are ways to entice customers other than quoting the lowest price. For example, he provides careful cleanup of branches and leaves, takes out stumps below ground level and waits until a customer is completely satisfied before taking payment. At the same time he realizes his bid for tree removal jobs must cover his costs. In this industry, Bowlin faces intense price competition from operators with more sophisticated wood processing equipment, such as chip grinders. Therefore, he is always open to suggestions about pricing strategy.

What types of costs should Bowlin evaluate when he is determining his break even point?

Answer 1

For breakeven analysis, Bowlin should evaluate three costs - Selling cost, Fixed and Variable.

1. Average selling price of service

2. FIxed costs include:

• Tools such as Chain saws, pickup vans etc.
• Insurance cost for vehicle
• Storage costs for tools (if there is a dedicated place)
• Fixed salaries (If crew members are hired employees)

3. Variable cost include

• Gasoline to run tools or pick-up vans
• Labor cost (if labor is part-time) - Labor required varies for each service
• Number of re-services required due to customer dissatisfaction

BReakeven point = (fixed cost) / (selling price - variable cost)