Break even analysis for incentive based profit system in producer-distributor supply chain system

Abstract

In a typical linear break even analysis, the Break Even Volume (BEV) is determined as the ratio of the total fixed cost and the difference between the total variable cost per volume (UVC) and the unit selling price (USP). Basically, this is feasible for traditional systems where the USP is greater than UVC. But in incentive based profit system adopted by most big companies for their distributors, where the distributor’s profitability is tied to his/her productivity rather than the price recovery factor, USP = UVC, and profit is based on the incentive obtained (which is a function of sales volume). The paper develops a BEV for such system, running a sensitivity analysis of the system. It was found that the BEV maintains a linear relationship with the total fixed cost, with a slope of the inverse of the product of USP and percentage of sales volume given as incentive/bonus. But for the USP and incentive plan (percentage of sales volume given as incentive/bonus) the BEV shares a negative power relationship.