This document discusses break-even analysis, which is used to determine the minimum level of sales or output needed for a business to cover its total costs. It provides an example of calculating break-even point for a trainer business with fixed costs of $5,000, variable costs of $3 per unit, and selling price of $8 per unit. The break-even point is calculated to be 100 units, which is the point where total revenue and total costs intersect. A break-even chart is presented to visually illustrate the areas of loss and profit depending on production levels. Advantages and disadvantages of break-even analysis are also summarized.
INTRODUCTION
A breakeven analysis is used to determine how much sales volume your business needs to start making a profit.
The breakeven analysis is especially useful when you're developing a pricing strategy, either as part of a marketing plan or a business plan.
In economics & business, specifically cost accounting, the break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has "broken even".
Total cost = Total revenue = B.E.P.
Breakeven Analysis- A decision-making aid that enables a manager to determine whether a particular volume of sales will result in losses or profits.
Made up of four basic concepts
Fixed costs- costs that do not change
Variable costs- costs that rise in propitiation to sales
Revenue- the total income received
Profit- the money you have after subtracting fixed and variable cost from revenue
INTRODUCTION
A breakeven analysis is used to determine how much sales volume your business needs to start making a profit.
The breakeven analysis is especially useful when you're developing a pricing strategy, either as part of a marketing plan or a business plan.
In economics & business, specifically cost accounting, the break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has "broken even".
Total cost = Total revenue = B.E.P.
Breakeven Analysis- A decision-making aid that enables a manager to determine whether a particular volume of sales will result in losses or profits.
Made up of four basic concepts
Fixed costs- costs that do not change
Variable costs- costs that rise in propitiation to sales
Revenue- the total income received
Profit- the money you have after subtracting fixed and variable cost from revenue
A breakeven analysis is used to determine how much sales volume your business needs to start making a profit.
The breakeven analysis is especially useful when you're developing a pricing strategy, either as part of a marketing plan or a business plan.
This presentation covers Accounting of Services and Operations like - Cinema Hall, Canteen, Hospital, Transport, Costing etc.
an important part in MBA Financce
In economic practices, there are several methods to determine the price and quantity of the goods and services. Determination of price and output depends on the objectives of the firm as well as competitors, the nature of the commodity, markets scope and so on. In these slides, I try to show, how price and output determine by using cost-plus and incremental cost techniques.
A breakeven analysis is used to determine how much sales volume your business needs to start making a profit.
The breakeven analysis is especially useful when you're developing a pricing strategy, either as part of a marketing plan or a business plan.
This presentation covers Accounting of Services and Operations like - Cinema Hall, Canteen, Hospital, Transport, Costing etc.
an important part in MBA Financce
In economic practices, there are several methods to determine the price and quantity of the goods and services. Determination of price and output depends on the objectives of the firm as well as competitors, the nature of the commodity, markets scope and so on. In these slides, I try to show, how price and output determine by using cost-plus and incremental cost techniques.
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Implicitly or explicitly all competing businesses employ a strategy to select a mix
of marketing resources. Formulating such competitive strategies fundamentally
involves recognizing relationships between elements of the marketing mix (e.g.,
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A Memorandum of Association (MOA) is a legal document that outlines the fundamental principles and objectives upon which a company operates. It serves as the company's charter or constitution and defines the scope of its activities. Here's a detailed note on the MOA:
Contents of Memorandum of Association:
Name Clause: This clause states the name of the company, which should end with words like "Limited" or "Ltd." for a public limited company and "Private Limited" or "Pvt. Ltd." for a private limited company.
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Registered Office Clause: It specifies the location where the company's registered office is situated. This office is where all official communications and notices are sent.
Objective Clause: This clause delineates the main objectives for which the company is formed. It's important to define these objectives clearly, as the company cannot undertake activities beyond those mentioned in this clause.
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Liability Clause: It outlines the extent of liability of the company's members. In the case of companies limited by shares, the liability of members is limited to the amount unpaid on their shares. For companies limited by guarantee, members' liability is limited to the amount they undertake to contribute if the company is wound up.
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Capital Clause: This clause specifies the authorized capital of the company, i.e., the maximum amount of share capital the company is authorized to issue. It also mentions the division of this capital into shares and their respective nominal value.
Association Clause: It simply states that the subscribers wish to form a company and agree to become members of it, in accordance with the terms of the MOA.
Importance of Memorandum of Association:
Legal Requirement: The MOA is a legal requirement for the formation of a company. It must be filed with the Registrar of Companies during the incorporation process.
Constitutional Document: It serves as the company's constitutional document, defining its scope, powers, and limitations.
Protection of Members: It protects the interests of the company's members by clearly defining the objectives and limiting their liability.
External Communication: It provides clarity to external parties, such as investors, creditors, and regulatory authorities, regarding the company's objectives and powers.
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Binding Authority: The company and its members are bound by the provisions of the MOA. Any action taken beyond its scope may be considered ultra vires (beyond the powers) of the company and therefore void.
Amendment of MOA:
While the MOA lays down the company's fundamental principles, it is not entirely immutable. It can be amended, but only under specific circumstances and in compliance with legal procedures. Amendments typically require shareholder
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2. The break-even level of output or sales
indicated to the owner or manager of a
business the minimum level of output that
must be sold so that total costs are covered.
At the break-even level of output a profit is
not being made but neither is a loss.
The ‘quicker’ a start-up business can reach
the break-even point the more likely it is to
survive – and then make a profit.
3. DRAWING A BREAK-EVEN ANALYSIS
In order to draw a break-even chart we
need the information about:
the fixed costs,
variable costs and
revenue of a business.
4. EXAMPLE
In a trainer business we will assume that:
Fixed costs are $5,000 per year
The Variable costs for each pair of trainer is
$3
Each pair of trainers is sold for a price of $8
The factory can produce a maximum output
of 2000 pairs of trainers per year.
5. To draw a break-even chart if will help if a
table is completed.
6. When output is 2000 units, variable costs will
be: 2000 x $3 = $6000
Assuming all output is sold, total revenue will
be 2000 x $8 = $16,000
Make sure you understand how the other
figures were arrived at before looking at how
the data is used to construct a break-even
chart.
8. What does the Graph Show?
The break-even point of production is where
total costs and total revenue cross. The
business must therefor sell 100 pairs of trainers
in order to avoid making a loss.
At production below the break-even point, the
business is making a loss, above this point it’s
making a profit. Maximum profit is made when
maximum output is reached and this is a point
level of $5000.
9. ADVANTAGES
Managers are able to read off the graph the
expected profit or loss to be made at any
level of output.
The impact on profit and loss on certain
business decisions can also be shown by
redrawing the graph.
The break-even chart can also be used to
show the safety margin - the amount by
which the sales exceed the break-even point
10. DISADVANTAGES
Break-even charts are made assuming all goods produced by the
company are actually sold – the graph does not show the possibility
that inventories may build up if not sold.
Fixed costs only stay constant if the scale of production does not
change
Break-even charts concentrate on the Break-even point of production,
but there many other aspects of the operation of the business which
need to be analysed by managers like how to reduce wastage or
increase sales.
The charts here used have assumed that costs and revenues can be
drawn on straight lines. This is not always the case, increasing output
to the capacity of a factory may involve paying overtime to workers. This
will make the variable cost line slope upwards as output expands. The
company may have to offer discounts to increase sales for large orders
which will cause the revenue line to slope less.
12. EXAMPLE
Haifa Supplies Ltd make wooden desks. The selling price for
each desk is $50. the variable costs of materials and production
labour are $20. The weekly fixed costs are $6000.
What is the break-even level of production? It is necessary to
calculate the Contribution (selling price minus the variable cost)
of each desk.
The calculation for the contribution is:
Selling Price – Variable Cost = Contribution
$50 - $20 = $30
Each desk gives a Contribution to fixed costs and profit of $30. In
order to break-even each week, the business must make sufficient
desks, contributing $30 each, to cover the fixed costs of $6000.