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Example 5: Decrease of Purchase Cost of Licenses - Break-even Target after 21 months from start of operations, September Y2.

Why this example? This example refers to the analytical approach to decrease the purchase cost of licenses to obtain break-even in September Y2, working with cash flows, financial statements and graphical interpretation. We are dealing with the case of the key management action: decrease in unit purchase cost. The objective is to obtain a break-even at 21 months from the beginning of operations, September Y2, when net margin becomes zero (0). For teaching purposes we shall consider that the cost reduction needed to obtain the target, over the baseline case, will be applied from April Y1 through September Y2. Management has negotiated with the supplier a much reduced purchase cost, to which the supplier has agreed upon as entering this important market is a top priority for this supplier, there is a sustained demand for the product. Even if it does not makes money supplying the software in the first two years it hopes to make a profit later on by selling more licenses to be resold by BIS Ltd. The following calculation procedure applies:

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