The optimum level of output shall be reached at the point where difference between the total revenue and the total cost is the highest. A The focus in manufacturing is revenue maximization, while the focus in service is cost minimization. Which is the best location? If we use the population as the loads and use rectilinear distance, which location is better in terms of its total load- distance score? Charts are relatively easy to construct and interpret. Open Hint for Question 14 in a new window. When the margin of safety is large, the business would want to try new pricing, marketing and take risks hoping to further increase sales and revenues. The volume of sales or production may be expressed in terms of rupees, units or as a percentage of capacity. Navy is considering four ports for their submarine squid proofing operations: San Diego, Bremerton, Virginia Beach, and Tulsa.
The goal is to locate at a minimum-cost site, where cost is measured by the annual fixed plus variable costs of production. Service and image compatibility with demographics of the customer-drawing area 3. Tangible costs are those readily identifiable and precisely measured. For example, fixed costs do not remain constant after a certain level of activity; variable costs do not always vary in direct proportion to changes in the volume of output because of the laws of diminishing and increasing returns; selling prices do not remain the same forever and for all levels of output due to competition and changes in the general price level; etc. This point enables the management to determine the level of activity below which the liquidity position of the firm would be adversely affected.
What is the weighted score for these sites? Construct a break-even chart showing the break-even point and the margin of safety at present. This requires the business to determine selling price, variable costs and fixed costs. The factor-rating method requires the modeler to select a set of factors that are most important and then to assign degree of importance to the factors. The company can then subtract the fixed costs of production from the contribution margin until the company achieves profitability. The construction of a profit-volume graph involves the following steps: i. Lubbock has scores of 8, 5, and 2 in these areas; El Paso has scores of 7, 6, and 5 in these areas; Dallas has scores of 6, 6, and 6 in these areas, and Houston has scores of 3, 7, and 9 in these areas.
This concept is used when a major proportion of sales are likely to decline or in period of recession or economic turn down. Smaller volumes might be transported by an independent carrier as a partial load in a truck. Understanding how to calculate the break-even point helps you determine how much you need to sell each unit for on the market. The lower limit of profit is the break-even point. Essentially, this distance is the sum of the two dashed lines representing the base and side of the triangle. The area above the horizontal of x-axis is called the profit area and the area below the horizontal axis is the loss area. On the other hand, small margin of safety indicates that position of the business is comparatively weak and even a small decline in the sales would adversely affect the profit of the business and may result into losses.
The goal is to locate at a minimum-cost site, where cost is measured by the annual fixed plus variable costs of production. For example, if a break-even analysis of a business reveal that 1000 units need to be produced to break-even. The greatest difficulty arises in the assignment of the scores and weights for the factors; it is likely that a slight change in either would yield a different choice as a best location. If the selling price is reduced to Rs. An economic comparison of locations can be made by identifying the fixed costs and variable costs plotting the breakeven analysis on graph for each location. Assumptions of Break-Even Analysis : The break-even analysis is based upon the following assumptions: i All elements of cost, i.
Thus, profit can be increased only upto a certain point and then it will decrease until it is converted into a loss. How to Do a Breakeven Analysis To conduct a breakeven analysis, use this formula: Fixed Costs divided by Revenue per unit - Variable costs per unit So before you apply the formula you need to know: Fixed Costs Fixed costs are costs that must be paid whether or not any units are produced. This can be easily done by placing a grid over an ordinary map. Break-even point calculation is a rather simple calculation that can help businesses with forecasting costs and sales. These loads may be expressed as tones or number of trips per week.
A business is said to break-even when its total sales are equal to its total costs. The assumption that all costs and revenues are represented by straight lines in unrealistic. Examples: Alison used a breakeven analysis to determine what prices she should set for her software products. D There is no difference in focus. If revenue per unit is the same regardless of where the goods is produced the total revenues can be eliminated from consideration.
Using the coordinates from the above table calculate the load-distance score for each tract. The method takes into account the location of the markets, the volume of goods shipped to those markets, and the shipping costs. Quality of the competition 5. Interpretation It is essential that the results from break-even analysis are interpreted correctly and the information is effectively utilized to make better, informed business decisions. Locational cost-profit-volume analysis is a method of determining the volume of production where a company breaks even with costs and profits. A Bremerton B Tulsa C San Diego D Virginia Beach 10. Algebraic Formula Method for Computing the Break-Even Point : The break-even point can be computed in terms of: a Units of sales volume.
It is assumed that all units produced are sold. Break-even analysis is a technique widely used by production management and management accountants. Cost Control and Monitoring Since costs Fixed and Variable affect the profitability of the business directly, the managers can easily see these changes through break-even analysis. Computation of the Break-Even Point : The break-even point can be computed by the following methods: i The Algebraic Formula Method ii Graphic or Chart Method. A break-even chart is a graphical representation of marginal costing. This graph shows profit and loss at different volumes of sales.