Accounting and Finance: Break-even Analysis and Investment Appraisal Techniques

This report covers different case scenarios which provide deeper insight about the concept of break-even analysis and investment appraisal techniques. It highlights profitability and liabilities as well as Tom & Jerry by preparing financial statements. Further, it entails the contribution of break-even analysis in decision making pertaining to sales and production.

Introduction to Accounting and Finance

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
QUESTION 1 –TOM & JERRY LIMITED....................................................................................3
Preparing statement of profitability and Financial Position by following the given transactions
.....................................................................................................................................................3
QUESTION 2 – FIDEL & ANA LIMITED....................................................................................3
a. Assessing contribution that each electric kettle will make referring the given scenario.........3
b. Computing break-even point and margin of safety.................................................................3
c. Calculating profit which firm will make if it produces and sells 48,000 electric kettles........3
d. Analyzing whether proposed strategy for Stockstone Ltd is good or not................................3
e. Explain the underpinning assumptions associated with the break-even model.......................3
QUESTION 3 – BIMBAGU PLC...................................................................................................3
a. Assessing the viability of new machine for Bimbagu Plc using investment appraisal tool....3
b. Analyzing the key merits and limitations of the differing investment appraisal techniques...5
c. Explaining the key benefits and limitations budgets as a strategic planning tool...................6
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Accounting may be defined as a process which is undertaken by manager for recording
transactions associated with business. With regards to business organization, accounting and
finance is highly significant as it furnishes information about company’s position as well as
performance. In order to meet information need of stakeholders every publicly listed firm
prepares and publish accounting statements at the end of year. For the purpose of effective
decision making and performance enhancement accounting team lays high level of emphasis on
evaluating each & every alternative available for investment purpose. The present report is based
on different case scenarios which will provide deeper insight about the concept of break-even
analysis and investment appraisal techniques. It highlights profitability and liabilities as well as
Tom & Jerry by preparing financial statements. Further, it entails the contribution of break-even
analysis in decision making pertaining to sales and production. Report also depicts the use of
capital budgeting technique in the selection of project which suitable for investment purpose.
Along with this, it also exhibits the strength and weakness related to each technique of
investment appraisal.
QUESTION 1 –TOM & JERRY LIMITED
Preparing statement of profitability and Financial Position by following the given transactions
Particulars Figures (in
£)
Figures (in
£)
Sales 633000
Less: cost of sales 297000
Wages paid 117,000
Add: Outstanding wages at the end of the year 2175 119175
GP 216825
Indirect expenses:
Depreciation on van 9600

Electricity Expenses 7725
Van running expenses 33600
Bad debts 1500
Rent paid (Less: prepaid rent at the end of the year)
(112500 – 22500) 90000
Total Operating Expenditure 142425
Net profit before tax 74400
Tax 5775
Net income after tax 68625
Statement of Financial Position for Tom & Jerry limited at 31 December 2020 is as follows:
Particulars Figures (in
£)
Figures (in
£)
Assets
Fixed assets: Delivery van 50400
Total fixed assets 50400
Current assets
Trade receivables 64500
Prepaid Rent 22500
Closing stock 228000
Cash 90000
Prepaid tax 1125
Total current assets 406125
Total assets 456525
Liabilities & shareholder’s equity
Current Liabilities
Trade Payables 93000

Bank O/D 110700
Outstanding Wages 2175
Outstanding Electricity Expenses 2025
Total current liabilities 207900
Shareholder's Equity
Share capital 180000
Add: Net profit 68625
Total shareholder's Equity 248625
Total liabilities and shareholder's Equity 456525
Working notes:
W.N. 1
Particulars Figures (in £)
credit sales 504,000
cash sales 129,000
Total Sales 633000
W.N. 2
Particulars Figures (in £)
Van’s purchase price 60000
scarp value 12000
Life of asset 5
Depreciation
(cost – scrap) / life 9600

W.N. 3
Particulars Figures (in £)
Expenses paid 5,700
Add: Outstanding expenses at the end of the year 2025
Sum of electricity expenses 7725
W.N. 4
Particulars Figures (in £)
Credit Purchases 486,000
Less: Trade Payables 393,000
Net Trade Payables 93000
W.N. 5
Particulars Figures (in £)
Annual Rent 90000
Rent Per month 7500
Prepaid rent of 3 months 22500
W.N. 6
Particulars Figures (in £)
Net profit after tax 68625
Reserves 68625
W.N. 7
Particulars Figures (in £)
COGS (Credit) 243000

COGS (Cash) 54000
Total Cost of sales 297000
Credit Purchases 486000
Cash Purchases 39000
Total Purchases 525000
Closing stock (525000 – 297000) 228000
W.N. 8
Particulars Figures (in £)
Issue of Equity 180000
Receipts from Trade Receivables 438000
Total Receipts 618000
Rent paid 112500
Tax paid
(2400+4500) 6900
Delivery van purchased 60000
Wages paid 117000
Electricity Expenses 5700
Payment to Trade Payables 393000
Van running expenses 33600
Total outflows 728700
Closing bank balance (Bank overdraft) (110700)
W.N. 9
Particulars Figures (in £)
Credit Sales 504,000

Less: Receipts from Trade Receivables 438,000
Closing Trade Receivables 66000
Less: Bad Debts 1500
Net Trade Receivables 64500
W.N. 10
Particulars Figures (in £)
Tax up to 31 march 2020 2,400
Add: Tax from 1st Jan 2020 to 31st march 2021 4,500
Less: Prepaid tax (from 1january 2020 to 31 march 2020) 1125
Net Tax 5775
W.N.11
Particulars Figures (in £)
Cash Sales 129000
Cash Purchases 39000
Net Cash Balance 90000
W.N.12
Particulars Figures (in £)
Delivery van purchased 60000
Depreciation 9600
Net asset value 50400

QUESTION 2 – FIDEL & ANA LIMITED
a. Assessing contribution that each electric kettle will make referring the given scenario
Variable Costs (per unit)
Particulars Figures (in £)
Materials 5.25
Labor 2.95
Variable overheads 1.85
Total VCPU 10.05
Fixed cost
Particulars Figures (in £)
Production 59000
Selling etc 47600
Total FC 106600
Particulars Figures (in £)
Selling price per unit 13
VCPU 10.05
Contribution per unit 2.95
b. Computing break-even point and margin of safety
Particulars Formula Figures
Fixed Cost 106600
Contribution per
unit
2.95
BEP (in units) FC / CPU 36136
BEP (in £) BEP (in units) * SPU 469763

Margin of Safety
units Current sales units – BEP units
53000 – 36136
= 16864
Margin of safety
in units Actual sales - Break even sales
689000 – 469763
= 219237
The above depicted table shows that Fidel & Ana Ltd need to sell 36136 units for
deriving the situation of no profit & loss. At this level, firm would become able to recoup all the
expenditure incurred.
c. Calculating profit which firm will make if it produces and sells 48,000 electric kettles
Particulars Units Figures (in £)
Figures (in £)
Sales 13 624000
Variable Cost
Materials 5.25 252000
Labor 2.95 141600
Variable overhead 1.85 88800
Total variable expenses
482400
Contribution 141600
Fixed Cost
Production 59000

Selling cost etc. 47600
Total FC 106600
Profit 35000
d. Analyzing whether proposed strategy for Stockstone Ltd is good or not
Particulars Unit price Figures (in £) Figures (in £)
Sales 14.17 878682
Variable Cost
Material 5.25 325553
Labor 2.95 182930
Variable overhead 1.85 114719
Less: Total variable expenses 623201
Contribution 255481
Less: Advertising 45000
Net contribution 210481
Fixed Cost
Production 59000
Selling cost etc. 47600
Total Fixed expenses 106600
Net profit 103881
According to above evaluation advertising strategy will prove be good for Stockstone Ltd
as it helps in attaining profit of £103881.
e. Explain the underpinning assumptions associated with the break-even model
BEP mode helps in examining margin of safety by referring revenues and cost associated
with particular product. Manager can determine the number of units which need to be sold for

covering both fixed and variable expenses (Tanco, Cat and Garat, 2019). Model or concept of
BEP is based on several assumption which mentioned below:
 Fixed cost, selling price, per employee productivity and product mix remains constant
which is not possible in the dynamic business arena.
 It focuses on dividing cost in terms of fixed and variable that associated with production
aspect (Kravchyk, Okur and Kovalenko, 2021). On the contrary to this, firm which
follows BEP model avoids semi-variable cost or expenses.
 According to this, Fidel & Ana assumes that no improvement will take place in
technology and efficiency of labor. On the other side, now technological advancements
are taking place more frequently (Fuksa, 2021). Companies make focus on adopting latest
advancement which contributes in effectual business operations.
 Cost and revenue shares linear relationship with each other which is also not true.
By doing evaluation it has assessed that BEP model is used by most of the firm with the
motive to assess sales unit and figures require to recover expenses (Sintha, 2020).
Specifically, manufacturing firms like Fidel & Ana undertakes BEP model for profit
planning and taking other strategic decision about business. However, there are some
limitations which affect the usage of BEP. The rationale behind this, all the assessment is
done considering past rather than future (Tannen, 2020). At the time of applying BEP model
accountant of Fide & Ana Ltd should refer limitations related to this model. Through this,
company would become able to make appropriate estimation ad thereby decisions as well.
QUESTION 3 – BIMBAGU PLC.
a. Assessing the viability of new machine for Bimbagu Plc using investment appraisal tool
According to the given case scenario, Bimbagu Plc, which manufactures motor parts,
wants to assess the extent to which proposed investment option in new machine will be good. In
this regard, several investment appraisal tools have been applied such as payback, net present
value and average rate of return.
Assessment of Cash inflows

Ye
ar
cash
inflows (in
£)
Less: cash
outflows (in £)
Depreciati
on (in £)
EAT
(in £)
Add:
Depreciation
(in £)
Net cash
inflows (in £)
1 17,000,000 6,400,000 7000000
3,600,
000 7000000 10,600,000
2 17,000,000 6,400,000 7000000
3,600,
000 7000000 10,600,000
3 17,000,000 6,400,000 7000000
3,600,
000 7000000 10,600,000
4 17,000,000 6,400,000 7000000
3,600,
000 7000000 10,600,000
5 17,000,000 6,400,000 7000000
3,600,
000 7000000 15,600,000
Computation of depreciation
Particulars
Figures (in
£)
Cost of new
machine 40000000
Scrap value 5000000
Expected life (in
years) 5
Depreciation 7000000
Payback period
Year Net cash inflows (in £) Cumulative cash inflows (in £)
1 10,600,000 10600000
2 10,600,000 21200000
3 10,600,000 31800000
4 10,600,000 42400000
5 15,600,000 58000000
= 3 + (40000000 – 31800000) / 10,600,000
= 3 + .8
= 3 years and 8 months

Net present value
Year
Net cash inflows
(in £)
PV
factor@7%
Present value of cash
inflows (in £)
1 10600000 0.935 9906542
2 10600000 0.873 9258451
3 10600000 0.816 8652757
4 10600000 0.763 8086689
5 15600000 0.713 11122584
Total discounted cash
inflows 47027024
Less: II 40000000
NPV 7027024
Average rate of return
Year Net cash inflows (in £)
1 10,600,000
2 10,600,000
3 10,600,000
4 10,600,000
5 15,600,000
Average EAT 11600000
Average investment 22500000
ARR 51.56%
Average earnings after tax = (initial investment + scrap value) / 2
= (40000000 + 5000000) / 2
Investment appraisal analysis entails that Bimbagu Plc should buy machine which in turn
helps in operational aspects to the significant level. Outcome of all the tools clearly indicates that
new machinery will aid in organizational growth or success. During the concerned time period
Bimbagu Plc would become able to recover initial investment timely and get suitable returns as
well. According to the assessment, in the investment of new machinery firm will get amount of
initial investment within 3 years and 8 months. Hence, after that Bimbagu plc will get profit and

thereby fulfills organization’s objective. In addition to this, ARR and NPV accounts for 51.56%
& £7027024 respectively. On the basis of investment appraisal tools business unit should give
priority to the project which has higher NPV and ARR (Baum, Crosby and Devaney, 2021).
Further, NPV method presents solution by taking into account time value of money concept.
Hence, by keeping all the aspects in mind it can be stated that investment opportunity is viable
from quantitative perspective.
b. Analyzing the key merits and limitations of the differing investment appraisal techniques
By doing assessment, it has found that all the investment appraisal techniques differ to
the significant level. Hence, while making selection of project investment manager of Bimbagu
Plc should consider both pros and cons as mentioned below:
Payback period
This tool reveals time period for which business unit has to wait in order to recover the
amount invested initially (Siksnelyte-Butkiene, Zavadskas and Streimikiene, 2020). With regards
to investment decision making, payback period method helps in identifying time which business
unit will take for getting back the fund expended in the concerned project.
Advantages Disadvantages
 It gives clear indication about the time
which firm will take toc recoup initial
investment.
 Assists in reducing the risk level and
losses associated with potential
investment opportunity.
 It facilitates quick solution or
framework for decision making.
Moreover, payback period can be
calculated by the manager easily
(Advantages and Disadvantages of
 Payback method presents solution
without taking into account time value
of money concept.
 It does not exhibit cash flows which
will be generated by the firm after the
period of initial investment.
 Neglects profitability aspects
pertaining to investment project which
in turn also limits its significance level.

Payback Period, 2021).
Net present value
It reflects difference which take place cash inflows and outflow pertaining to specific
period by referring time value of money concept. By this, organization can assess return which
will be generated after specific time period using PV factor (O’Shaughnessy and et.al., 2019).
Through this, analyst can identify whether investment is in line with firm’s objective or not.
Advantages Disadvantages
 Facilitates comparison among
alternatives and thereby assists in
making selection of best one.
 Presents outcome by applying time
value of money concept which have
high importance in the current time
period (Pros and Cons of Using Net
Present Value (NPV), 2021).
 At the time of assessment or evaluation
it considers cash flows rather than net
earnings.
 Lacking standards criteria in relation to
the selection of discounting factor.
 It does not suit to the projects which
vary in terms of size or duration.
 Interest rates may change adversely
which in turn place direct impact on
cash flows and final outcome as well.
Average rate of return
ARR represents expected rate of return which is expected by the firm on initial
investment over life span of project (Shvetsova, Rodionova and Epstein, 2018). This method
indicates average % return that associated with potential opportunity.
Advantages Disadvantages
 Helps in doing comparison of two  Ignores both cash flows and time value

projects for investment purpose.
 Furnishes clear picture of profitability
related to potential opportunity.
 Easy to calculate and understand is one
of the benefit of ARR technique.
of money concept. Due to these aspects
fair rate of return cannot be assessed
referring ARR (Accounting Rate of
Return (ARR) Method: Advantages and
Disadvantages, 2021).
 Does not lay emphasis on computing
terminal value of project.
c. Explaining the key benefits and limitations budgets as a strategic planning tool
Budget may be defined as financial framework which presents estimated revenue and
expenditure pertaining to specific time period. For making optimum use of financial resources
business unit prepares budget by evaluating key activities. There are several types of budget
which business unit prepares such as material, labour, overhead etc. In business unit, budgeting
is highly crucial part of strategic planning as it directly impacts aspect of goal achievement
(Neves and et.al., 2020). By forming and circulate budgets among related departments Bimbagu
Plc can make enough usage of funds. Moreover, budget clearly exhibits amount which need to be
spent in different activities.
Advantages
 Budgeting facilitates decision making in an effectual way as it places more emphasis on
reviewing activities. By this, company can identify the ways through which purchase
price of labor, material etc can be reduced. For example: In ZBB, every business activity
and alternative actions are reviewed for identifying cost effectual practices. Further, ZBB
also helps in avoiding redundant activities from operations.
 Control tool: Budget may be served as a strategic tool for the purpose of monitoring and
control. On the basis of this, by doing comparison of actual performance in against to the
benchmarks Bimbagu Plc can assess deviations (Nadikattu, 2020). In this way, through

finding causes of deviations company can take corrective measures for improvement.
Besides this, variance results also help in setting bonus and incentive plan for personnel
appropriately.
 Smooth business functioning: Budgeting helps in performing business operations and
functions smoothly as all the departments of business units have clear idea about
expenditure as well as revenue sources. Through this, Bimbagu Plc can make control
over unnecessary expenses and thereby improves resource utilization.
 Effectual assessment of profitability: With the help of budgeting company can make
proper assessment of profitability aspect and thereby would become able to do further
planning (The Advantages and Disadvantages of Budgeting, 2021). It provides high level
of assistance to Bimabgu Plc in identifying the extent to which particular product or
service is profitable. On the basis of such analysis management team can make decision
about product or services which need to be dropped.
 Assist in planning about funding: Company can do significant planning about funding
by taking into account budgeting process. Moreover, it clearly entails fund which
business unit has as working capital and for investment purpose as well. By reviewing
this, Bimbagu Plc can find fund which firm need to raise for meeting capital requirement.
Disadvantage
 It may cause of demotivation among employees if business unit fails to set appropriate
budgeting framework referring inflationary conditions. Moreover, results of variance
analysis are highly depends on budget setting down by higher authority (Petera and
Šoljaková, 2020). In the case of higher variances employees feel demotivated and their
performance affected adversely.
 Budgeting is highly time intensive exercise as financial analyst need to collect
information from several departments.
 Along with this, budgeting practice is costly because now management team uses
software for the formation of financial framework. If Bimbagu Plc does not have skilled
workforce then it may result into inappropriate framework.

 It is based on assumptions and estimations regarding future aspects which in turns not
appropriate in every situation (Falqueto and et.al., 2020). This aspect limits the
significance of budgeting as a tool for strategic planning and development.
Hence, by considering overall evaluation it can be said that budgeting helps in evaluating
revenue, expenses and profitability in the best possible way. By this, firm can take prominent
decisions for business success.
CONCLUSION
By summing up this report, it has been articulated that financial statements clearly exhibit
profitability position of firm pertaining to specific time period. Business unit can evaluate
financial position and performance by preparing financial statements at the end of accounting
period. Besides this, it can be inferred from the evaluation that break-even analysis technique is
highly significant for Fidel & Ana limited. Moreover, it helps firm in taking appropriate
decisions about manufacturing, sales and profitability aspect. Along with this, it can be
mentioned that BEP analysis considers several assumption regarding revenue, cost, quantity etc.
Hence, at the time of applying BEP technique business unit should take into account its
limitations as well. It can be summarized that investment appraisal techniques help in evaluating
option from several perspectives such time duration, return in both percentage and numeric
format. On the basis of analysis, Bimbagu Plc should buy machine for business expansion and
goals achievement. The rationale behind this, through using machinery firm will get positive
returns and recoup investment within suitable time period.

REFERENCES
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Kravchyk, K. V., Okur, F. and Kovalenko, M. V., 2021. Break-Even Analysis of All-Solid-State
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Nadikattu, R. R., 2020. Effective Innovation Management in Strategic Planning. Rahul Reddy
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Siksnelyte-Butkiene, I., Zavadskas, E. K. and Streimikiene, D., 2020. Multi-criteria decision-
making (MCDM) for the assessment of renewable energy technologies in a household: A
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Sintha, L., 2020. Importance of Break-Even Analysis for the Micro, Small and Medium
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