Organic Fruit and Veg Business
calculate the marginal cost of producing one box of vegetables
- 9/2 = 4.5 (one box) 4.5+4 = $8.50 (actual cost of the vegetables)
state the formula for break-even in boxes (units)
- fixed costs/contribution per unit
calculate the break-even point in boxes (units)
- 10,500+17,000 (fixed costs)
- 8.50 = $3.50 (contribution)
- 17000/3.50 = 4857 boxes (breakeven point)
Sibon plc Manufacturers
contribution per unit sold
- 4 units break-even in units
- 2250 units
3 things that you could do to reduce the break even output
- LOWER FIXED COSTS (rent/hire machinery instead of buy)
- REDUCE VARIABLE COSTS (increases contribution/unit, however may cause lower quality)
- INCREASE SELLING PRICE (increases contribution/unit, however demand may decrease)
EFFECTS ON BREAK-EVEN
- higher selling price = higher contribution/unit = lower breakeven output
- lower selling price = lower contribution/unit = higher breakeven output
- higher variable cost/unit = lower contribution/unit = higher breakeven output
- lower variable cost/unit = higher contribution/unit = lower breakeven output
- increase in fixed costs = no change to contribution/unit = higher breakeven output
- decrease in fixed costs = no change to contribution/unit = lower breakeven output
strengths of breakeven analysis
- focuses on what output is required before a business reaches profitability
- helps management and finance-providers better understand the viability and risk of a business or business idea
- margin of safety calculation shows how much a sales forecast can prove over-optimistic before losses are incurred
- illustrates the importance of keping fixed costs down to a minimum
- calculations are quick and easy
limitations of breakeven analysis
- unrealistic asumptions - products are not sold at the same price at different levels of output; fixed costs do vary when output changes
- sales are unlikely to be the same as output - there may be some build up of stocks or wasted output too
- variable costs do not always stay the same. for example as ouput rises the busienss may benefit from being able to buy inputs at lowers prices (buying power)
- most businesses sell more than one product
- a planning aid rather than a decision-making tool
plenary
profit = contribution - fixed costs therefore profit + fixed costs = contribution and contribution - profit = fixed costs
contribution = £15900 profit = 22500 - £20650 = £1850 FIXED COSTS = £15900 - £1850 = £14050