Impact of Advertisement Expenditure on Sales Revenue
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AI Summary
This report analyzes the impact of advertisement expenditure on the sales revenue of a company. It includes a calculation of the coefficient of correlation, graphical representation of the data, and critical analysis of the impact. It also provides advice to the marketing manager on gaining a competitive advantage through alternative marketing tactics.
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BUSINESS ANALYTIC
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Table of Contents
INTRODUCTION......................................................................................................................3
QUESTION 1.............................................................................................................................3
QUESTION 2.............................................................................................................................6
Calculation of coefficient of correlation for advertising and sales........................................6
Graphical representation of the data of sales and advertisement expenditure and
interpretation of the pattern....................................................................................................7
Critical analysis of the impact of expenditure on advertisement on the sales of the company
................................................................................................................................................8
Advising marketing manager on gaining competitive advantage by adopting alternative
marketing tactics....................................................................................................................8
QUESTION 3.............................................................................................................................9
a) Calculation of Break-even sales and margin of safety.......................................................9
b) Recommendation on adoption of Plan.............................................................................11
c) Factors that must be consider by Mansleep Plc. management in above case..................11
d) Benefits and Limitations of Break-even model...............................................................11
CONCLUSION........................................................................................................................13
REFERENCES.........................................................................................................................14
INTRODUCTION......................................................................................................................3
QUESTION 1.............................................................................................................................3
QUESTION 2.............................................................................................................................6
Calculation of coefficient of correlation for advertising and sales........................................6
Graphical representation of the data of sales and advertisement expenditure and
interpretation of the pattern....................................................................................................7
Critical analysis of the impact of expenditure on advertisement on the sales of the company
................................................................................................................................................8
Advising marketing manager on gaining competitive advantage by adopting alternative
marketing tactics....................................................................................................................8
QUESTION 3.............................................................................................................................9
a) Calculation of Break-even sales and margin of safety.......................................................9
b) Recommendation on adoption of Plan.............................................................................11
c) Factors that must be consider by Mansleep Plc. management in above case..................11
d) Benefits and Limitations of Break-even model...............................................................11
CONCLUSION........................................................................................................................13
REFERENCES.........................................................................................................................14
INTRODUCTION
Business analytics is defined as a process of analysing the actual business situation of
the venture. This is all about understanding the analytics of the different business operations
and revenue channels to understand the significance of the business performance. This report
will be detailed assessing the records and operational performance of the CF Ltd. Henceforth,
report will analysis about the costing of company. On the other had the aim of the report is to
analysis the profitability of the organisation. Performance of company will be understood
based on the next five financial years estimated sales. Correlation coefficient will be derived
under this project. Advice will be given over the advertisement expense and the sales of
company. Different areas associated with costing, operations of company will be understand
under this project.
QUESTION 1
(a) Mathematical information
Cost Amount (£)
Fixed cost 80000
Variable cost 130000 (200000 * .65)
Total cost 210000
The cost structure is segregated into fixed cost and variable cost. The fixed cost is an
expense that remains fixed irrespective of the level of operations and functions. This is a level
of costing that is all about keeping the cost level fixed in nature. This cost do never changes.
The variable cost on the other side is a cost structure that keeps on changes based on the level
of operations and production activity entertained. The basic difference between the fixed cost
and variable cost is one cost do change and get influenced with the level of production
activity entertained and the other cost do not face any impact with the level of activity
entertained by the business entity (Pietrzak, Wnuk-Pel and Christauskas, 2020). The fixed
cost derives value at 80000 and the variable cost identified as 130000. Both the type of cost
comprises with the value 210000. This can be stated that the total cost incurred by the
business unit is 210000 for the respective financial year.
(B) Profit and loss for business
Particular Amount (£)
Business analytics is defined as a process of analysing the actual business situation of
the venture. This is all about understanding the analytics of the different business operations
and revenue channels to understand the significance of the business performance. This report
will be detailed assessing the records and operational performance of the CF Ltd. Henceforth,
report will analysis about the costing of company. On the other had the aim of the report is to
analysis the profitability of the organisation. Performance of company will be understood
based on the next five financial years estimated sales. Correlation coefficient will be derived
under this project. Advice will be given over the advertisement expense and the sales of
company. Different areas associated with costing, operations of company will be understand
under this project.
QUESTION 1
(a) Mathematical information
Cost Amount (£)
Fixed cost 80000
Variable cost 130000 (200000 * .65)
Total cost 210000
The cost structure is segregated into fixed cost and variable cost. The fixed cost is an
expense that remains fixed irrespective of the level of operations and functions. This is a level
of costing that is all about keeping the cost level fixed in nature. This cost do never changes.
The variable cost on the other side is a cost structure that keeps on changes based on the level
of operations and production activity entertained. The basic difference between the fixed cost
and variable cost is one cost do change and get influenced with the level of production
activity entertained and the other cost do not face any impact with the level of activity
entertained by the business entity (Pietrzak, Wnuk-Pel and Christauskas, 2020). The fixed
cost derives value at 80000 and the variable cost identified as 130000. Both the type of cost
comprises with the value 210000. This can be stated that the total cost incurred by the
business unit is 210000 for the respective financial year.
(B) Profit and loss for business
Particular Amount (£)
Sales 600000 (200000 * 3)
Less:
Total cost 210000
Profit 390000
0 1 2 3 4 5
0
200000
400000
600000
800000
1000000
1200000
1400000
600000
693000
800415
924513
1068793
1233651
130000 137800 146068 154832 164122 173969
80000 80000 80000 80000 80000 80000
390000 475200
574347
689681
824671
979682
Sales
Variable cost
Fixed cost
Profit
Series5
The profit derived against the operations and functions entertained of the organisation
are 390000. This is a level of profitability that can favour the business unit to deliver the
business operations in profits. The total sales of company are 600000 and the total cost
incurred comprises with fixed cost and the variable cost is 210000. Profit is a figure derives
by deducting the total cost with the sale price to identify the total profitability of the
operations entertained by the company. Total cost deducted is 210000. The difference
between the total cost and the sales price collected is the factor identified as a profit of the
organisation. The above projected graph state figures of the next five expected financial
years. The next five years projection clearly indicates that the company profitability would
certainly increase as the sales of company would increase. The profit expected figure would
be achieve in the end of the five financial years is 979682 this would go from 390000. This is
a huge jump in context to the five financial years that the profit figures of company have
gone to thrice the earlier value.
The graph indicates the way company will proceed further in the business operations
and deliver the performance of company. The sales of company keep on changing every year
Less:
Total cost 210000
Profit 390000
0 1 2 3 4 5
0
200000
400000
600000
800000
1000000
1200000
1400000
600000
693000
800415
924513
1068793
1233651
130000 137800 146068 154832 164122 173969
80000 80000 80000 80000 80000 80000
390000 475200
574347
689681
824671
979682
Sales
Variable cost
Fixed cost
Profit
Series5
The profit derived against the operations and functions entertained of the organisation
are 390000. This is a level of profitability that can favour the business unit to deliver the
business operations in profits. The total sales of company are 600000 and the total cost
incurred comprises with fixed cost and the variable cost is 210000. Profit is a figure derives
by deducting the total cost with the sale price to identify the total profitability of the
operations entertained by the company. Total cost deducted is 210000. The difference
between the total cost and the sales price collected is the factor identified as a profit of the
organisation. The above projected graph state figures of the next five expected financial
years. The next five years projection clearly indicates that the company profitability would
certainly increase as the sales of company would increase. The profit expected figure would
be achieve in the end of the five financial years is 979682 this would go from 390000. This is
a huge jump in context to the five financial years that the profit figures of company have
gone to thrice the earlier value.
The graph indicates the way company will proceed further in the business operations
and deliver the performance of company. The sales of company keep on changing every year
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that too also influence the variable cost of company which is also increasing as the sales of
company is increasing. He further evaluation identified is the fixed cost that is remain the
same irrespective of the financial year passes and the level of operations or production
increases (Klimaitienė and Kundzelevičius, 2020). This is a basic nature of the fixed cost that
it remain unchanged at any point and position or the level of functions and operations. The
role of fixed cost and the variable cost is very significant in respect to the business venture.
With the process of time company sale is keep on increasing that could further influenced the
profitability of the business unit. The variable cost is not increasing in proportion to the sales
of company that significantly establishing the profit making opportunities for the business
organisation. This has been analysed that the business unit is capable enough to generate
profitability against delivering the business operations.
(c) Costing and revenue behaviour
The costing is a value that is a total outlay of the financial resources of the business
organisation. The costing behaviour is such that with the pace of time and output the total
costing is increases. This consumes variable cost and the fixed nature cost of the business
unit. With the process of time and production variable cost face by the CF Ltd would get an
increase. This would not further influence the fixed nature cost face by the business
organisation. It becomes important for the business venture to understand the significance of
the fixed cost and the variable cost entertained by the business organisation. The costing of
company is behaved very progressively (Situmorang, 2020). With the process of time the cost
incurred will also increase for the business unit. This is certainly indicated that the business
unit require facing the fixed and variable nature of cost that state about the level of costing
incurred by the business unit. The costing behaviour is all about the level of cost is certainly
influenced with the time factor and the level of production company deliver to incorporate the
business functions. The cost nature is very progressive that is influenced with various
elements of business environment that certainly create an impact over the costing and pricing
of the business unit.
The costing of the business unit is derived with the direct nature of cost and the
indirect nature of cost. The direct cost is a nature of cost that is directly involved under the
production and operations of the business venture. This is important for the organisation to
certainly guide the direct cost as it is directly associated with the operations and the
production processes of the business unit. This is a cost consumed over the direct material,
company is increasing. He further evaluation identified is the fixed cost that is remain the
same irrespective of the financial year passes and the level of operations or production
increases (Klimaitienė and Kundzelevičius, 2020). This is a basic nature of the fixed cost that
it remain unchanged at any point and position or the level of functions and operations. The
role of fixed cost and the variable cost is very significant in respect to the business venture.
With the process of time company sale is keep on increasing that could further influenced the
profitability of the business unit. The variable cost is not increasing in proportion to the sales
of company that significantly establishing the profit making opportunities for the business
organisation. This has been analysed that the business unit is capable enough to generate
profitability against delivering the business operations.
(c) Costing and revenue behaviour
The costing is a value that is a total outlay of the financial resources of the business
organisation. The costing behaviour is such that with the pace of time and output the total
costing is increases. This consumes variable cost and the fixed nature cost of the business
unit. With the process of time and production variable cost face by the CF Ltd would get an
increase. This would not further influence the fixed nature cost face by the business
organisation. It becomes important for the business venture to understand the significance of
the fixed cost and the variable cost entertained by the business organisation. The costing of
company is behaved very progressively (Situmorang, 2020). With the process of time the cost
incurred will also increase for the business unit. This is certainly indicated that the business
unit require facing the fixed and variable nature of cost that state about the level of costing
incurred by the business unit. The costing behaviour is all about the level of cost is certainly
influenced with the time factor and the level of production company deliver to incorporate the
business functions. The cost nature is very progressive that is influenced with various
elements of business environment that certainly create an impact over the costing and pricing
of the business unit.
The costing of the business unit is derived with the direct nature of cost and the
indirect nature of cost. The direct cost is a nature of cost that is directly involved under the
production and operations of the business venture. This is important for the organisation to
certainly guide the direct cost as it is directly associated with the operations and the
production processes of the business unit. This is a cost consumed over the direct material,
labour and many other cost included under the production process of the CF Ltd. This is all
about analysing the requirements of the business unit and based on that fact try to make the
cost cheaper than the earlier cost to make it more affordable in nature. On the other side the
costing structure also comprises with the indirect nature of cost (Aillón, Rocha and Marques,
2018). This is a cost that does not have any direct involvement in the production and
operations of the organisation. This is a cost that is all about the indirect nature of operations.
This is cost do not directly associate with producing the units and operations of the business
organisation. This cost is only involved in channelizing regular business operations. The
example of this cost is rent, electricity and all other cost. The nature of costing is very
progressive in nature and also the classification is very clear and identified. This is very
obvious that the business organisation know about the areas where costing is incurred as a
business venture.
On the other side the revenue generated by the business unit is also carry a nature of
progressive. The CF Ltd revenue is progressive in nature as it is increasing with the pace of
time. The more company proceed to deliver the business operations the more selling
opportunities company will get and the more the progression of business will be guided
towards the growth of company. This is important for the entity to guide the revenue in such
manner that company get to fulfil all its business objectives (Saridaki and Haugbølle, 2019).
The revenue of the company is keep on increasing every year that could also become the
possible reason why the business unit has upgraded its profit making opportunities in the
business. This is essential for the revenue situation as the business unit get to increases its
revenue every single financial year so that operations of company could been achieving all its
objectives.
QUESTION 2
Calculation of coefficient of correlation for advertising and sales
Year Advertisemen
t expenditure
(X)
Revenue
from
Sales (Y)
X2 Y2 XY
2016 2 100 4 10000 200
2017 5 90 25 8100 450
2018 4 70 16 4900 280
2019 6 60 36 3600 360
2020 3 80 9 6400 240
n = 5 ∑X = 20 ∑Y =
400
∑X2 =
90
∑Y2 =
33000
∑XY =
1530
about analysing the requirements of the business unit and based on that fact try to make the
cost cheaper than the earlier cost to make it more affordable in nature. On the other side the
costing structure also comprises with the indirect nature of cost (Aillón, Rocha and Marques,
2018). This is a cost that does not have any direct involvement in the production and
operations of the organisation. This is a cost that is all about the indirect nature of operations.
This is cost do not directly associate with producing the units and operations of the business
organisation. This cost is only involved in channelizing regular business operations. The
example of this cost is rent, electricity and all other cost. The nature of costing is very
progressive in nature and also the classification is very clear and identified. This is very
obvious that the business organisation know about the areas where costing is incurred as a
business venture.
On the other side the revenue generated by the business unit is also carry a nature of
progressive. The CF Ltd revenue is progressive in nature as it is increasing with the pace of
time. The more company proceed to deliver the business operations the more selling
opportunities company will get and the more the progression of business will be guided
towards the growth of company. This is important for the entity to guide the revenue in such
manner that company get to fulfil all its business objectives (Saridaki and Haugbølle, 2019).
The revenue of the company is keep on increasing every year that could also become the
possible reason why the business unit has upgraded its profit making opportunities in the
business. This is essential for the revenue situation as the business unit get to increases its
revenue every single financial year so that operations of company could been achieving all its
objectives.
QUESTION 2
Calculation of coefficient of correlation for advertising and sales
Year Advertisemen
t expenditure
(X)
Revenue
from
Sales (Y)
X2 Y2 XY
2016 2 100 4 10000 200
2017 5 90 25 8100 450
2018 4 70 16 4900 280
2019 6 60 36 3600 360
2020 3 80 9 6400 240
n = 5 ∑X = 20 ∑Y =
400
∑X2 =
90
∑Y2 =
33000
∑XY =
1530
r = n*(∑XY) – (∑X) (∑Y) / √ [n*∑X2 – (∑X) 2] [n∑Y2 – (∑Y) 2]
r = 5*(1530) – (20) (400) / √ [5*90 – (20)2] [5*33000 – (400)2]
r = 7650 – 8000 / √ [450 – 400] [165000 – 160000]
r = -350 / √ 50 * 5000 = -350 / √250000 = -350 / 500 = -0.7
Interpretation: The coefficient of
correlation is meant for identifying and
measuring the level or the type of
relationship existing between two
variables. Various techniques of
measuring correlation are there, but the
most popular one is Pearson’s
correlation coefficient. Here in the
above illustration, Pearson’s correlation coefficient has been used denoted by r, in order to
study the relationship existing between the two variables that is, advertisement expenditure
and sales revenue (Gogtay and Thatte, 2017). In Pearson’s correlation coefficient, the value
derived of correlation always falls within the range of -1 and 1. When the value is 1, this
depicts positive and strong relationship existing between the variables while if the value is -1,
then this depicts negative relationship between variables, or if the value is zero, this means
there is no correlation between the variables. In the above illustration, the value is -0.7 which
indicates that there is negative relationship between advertisement expenditure and sales
revenue. If there is an increase in one variable (advertisement expenditure) then this will
result in decline in another variable (sales revenue).
b)
X
(expenditure
on
advertisement
)
Y (Revenue
from sales)
X
(expenditure
on
advertisement
)
1 -0.7
Y (Revenue
from sales)
-0.7 1
r = 5*(1530) – (20) (400) / √ [5*90 – (20)2] [5*33000 – (400)2]
r = 7650 – 8000 / √ [450 – 400] [165000 – 160000]
r = -350 / √ 50 * 5000 = -350 / √250000 = -350 / 500 = -0.7
Interpretation: The coefficient of
correlation is meant for identifying and
measuring the level or the type of
relationship existing between two
variables. Various techniques of
measuring correlation are there, but the
most popular one is Pearson’s
correlation coefficient. Here in the
above illustration, Pearson’s correlation coefficient has been used denoted by r, in order to
study the relationship existing between the two variables that is, advertisement expenditure
and sales revenue (Gogtay and Thatte, 2017). In Pearson’s correlation coefficient, the value
derived of correlation always falls within the range of -1 and 1. When the value is 1, this
depicts positive and strong relationship existing between the variables while if the value is -1,
then this depicts negative relationship between variables, or if the value is zero, this means
there is no correlation between the variables. In the above illustration, the value is -0.7 which
indicates that there is negative relationship between advertisement expenditure and sales
revenue. If there is an increase in one variable (advertisement expenditure) then this will
result in decline in another variable (sales revenue).
b)
X
(expenditure
on
advertisement
)
Y (Revenue
from sales)
X
(expenditure
on
advertisement
)
1 -0.7
Y (Revenue
from sales)
-0.7 1
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Graphical representation of the data of sales and advertisement expenditure and interpretation
of the pattern
2015 2016 2017 2018 2019 2020 2021
0
20
40
60
80
100
120
Correlation Coefficient
Advertising expenditure (X) Sales revenue (Y)
Interpretation:
In the above graph, it is clearly indicated that there is a negative relationship
between sales revenue and advertisement expenditure. As it can be seen that increase in
expenditure on advertisement results in the decline of sales revenue. Such an inverse
relationship between these variables can be justified as, in the year 2016 when the
advertisement expenditure was £2000, the generated sales revenue was £100000 and when
the company increases its expenditure on advertisement in 2017 to £5000, the sales of the
company declined to £90000.
c)
Critical analysis of the impact of expenditure on advertisement on the sales of the company
Advertisement done by the company generally results in the creation of brand image
for the business which then leads to rise in sales revenue and accordingly net profits of the
company. Advertisement is also helpful in maintaining better reputation in the market and
also in the minds of the company’s clients (Camilleri, 2018). Generally, advertisements as a
tool used by businesses to build relations with public and develop a valuable contacts with
the society. All these benefits derived from advertisement are the routes by which
management resorts to promoting their business among the target audience in an attempt to
generate more sales. Therefore, advertisement is regarded as the best method adopted by
companies to ensure positive impact on their final outcomes.
Advising marketing manager on gaining competitive advantage by adopting alternative
marketing tactics
In order to raise the revenue of the company, the marketing manager of W.W ltd. can make
use of many alternative strategies in order to gain competitive advantage in the detergent
industry. Such as follows:
of the pattern
2015 2016 2017 2018 2019 2020 2021
0
20
40
60
80
100
120
Correlation Coefficient
Advertising expenditure (X) Sales revenue (Y)
Interpretation:
In the above graph, it is clearly indicated that there is a negative relationship
between sales revenue and advertisement expenditure. As it can be seen that increase in
expenditure on advertisement results in the decline of sales revenue. Such an inverse
relationship between these variables can be justified as, in the year 2016 when the
advertisement expenditure was £2000, the generated sales revenue was £100000 and when
the company increases its expenditure on advertisement in 2017 to £5000, the sales of the
company declined to £90000.
c)
Critical analysis of the impact of expenditure on advertisement on the sales of the company
Advertisement done by the company generally results in the creation of brand image
for the business which then leads to rise in sales revenue and accordingly net profits of the
company. Advertisement is also helpful in maintaining better reputation in the market and
also in the minds of the company’s clients (Camilleri, 2018). Generally, advertisements as a
tool used by businesses to build relations with public and develop a valuable contacts with
the society. All these benefits derived from advertisement are the routes by which
management resorts to promoting their business among the target audience in an attempt to
generate more sales. Therefore, advertisement is regarded as the best method adopted by
companies to ensure positive impact on their final outcomes.
Advising marketing manager on gaining competitive advantage by adopting alternative
marketing tactics
In order to raise the revenue of the company, the marketing manager of W.W ltd. can make
use of many alternative strategies in order to gain competitive advantage in the detergent
industry. Such as follows:
Creation of user-friendly website: By creating a website of the company, many
useful information about the company, its products & services can be communicated to the
clients of the business such as customers, suppliers, etc. Also, it is helpful in online
transacting with clients which is considered as the best driver of customer satisfaction and
better service provision to them (Felix, 2021). It provides an ease to the customers in
navigating through the offerings of the company and making choices among the range of
products demonstrated online. Creating a company’s website involves a little bit higher costs
to the company, but on the other side it is very fruitful from the perspective of the long term
growth of the business.
Digital marketing strategy: This strategy of marketing company’s products and
services is a widely used modern technique by the companies in an attempt to target large
number of target audience with a minimum costs and efforts through the use of online or
digital platforms (Tong, Luo and Xu, 2020). With reference to detergent manufacturer, this
technique can be used to promote variants of products and services in an effective manner by
increasing their market presence through the use of channels such as social networking sites.
This would be helpful in enhancing the brand recognition in the market. By using this
strategy, W.W limited can share their pictures, videos, news and achievements of their
business and thus this will result in better image of their brand in the marketplace.
Accordingly, obtaining consideration from large audience in the form of sales generation
becomes easier. Also, such an online presence is helpful in communicating and hearing the
perspectives and views of the clients, tackling their queries and receiving their feedback from
time to time.
Competitor analysis: Analysing competitor’s strategy and attempts towards
promoting and marketing their products and services is also considered as a best marketing
tactics. Here, the company by evaluating and identifying the competition existing in the
market, what other players in the industry are doing and what are the expectations of
customers that has not yet been met by the competitors can be very much helpful in
identifying untapped opportunities (Quaye and Mensah, 2019). And by exploiting such
prevailing opportunities in the industry, W.W limited can enhance their market share. Also,
better knowledge about the existing conditions of the market can be obtained through such
analysis and therefore determination of unmet needs become easier and the company can take
advantage of the same before its competitors.
QUESTION 3
a) Calculation of Break-even sales and margin of safety
Income Statement under different scenario
Particulars Original Estimates
(£)
Production
manager suggestion
Marketing
manager
suggestion
useful information about the company, its products & services can be communicated to the
clients of the business such as customers, suppliers, etc. Also, it is helpful in online
transacting with clients which is considered as the best driver of customer satisfaction and
better service provision to them (Felix, 2021). It provides an ease to the customers in
navigating through the offerings of the company and making choices among the range of
products demonstrated online. Creating a company’s website involves a little bit higher costs
to the company, but on the other side it is very fruitful from the perspective of the long term
growth of the business.
Digital marketing strategy: This strategy of marketing company’s products and
services is a widely used modern technique by the companies in an attempt to target large
number of target audience with a minimum costs and efforts through the use of online or
digital platforms (Tong, Luo and Xu, 2020). With reference to detergent manufacturer, this
technique can be used to promote variants of products and services in an effective manner by
increasing their market presence through the use of channels such as social networking sites.
This would be helpful in enhancing the brand recognition in the market. By using this
strategy, W.W limited can share their pictures, videos, news and achievements of their
business and thus this will result in better image of their brand in the marketplace.
Accordingly, obtaining consideration from large audience in the form of sales generation
becomes easier. Also, such an online presence is helpful in communicating and hearing the
perspectives and views of the clients, tackling their queries and receiving their feedback from
time to time.
Competitor analysis: Analysing competitor’s strategy and attempts towards
promoting and marketing their products and services is also considered as a best marketing
tactics. Here, the company by evaluating and identifying the competition existing in the
market, what other players in the industry are doing and what are the expectations of
customers that has not yet been met by the competitors can be very much helpful in
identifying untapped opportunities (Quaye and Mensah, 2019). And by exploiting such
prevailing opportunities in the industry, W.W limited can enhance their market share. Also,
better knowledge about the existing conditions of the market can be obtained through such
analysis and therefore determination of unmet needs become easier and the company can take
advantage of the same before its competitors.
QUESTION 3
a) Calculation of Break-even sales and margin of safety
Income Statement under different scenario
Particulars Original Estimates
(£)
Production
manager suggestion
Marketing
manager
suggestion
(£) (£)
Sales 440000 440000 528000 Note3
Less Variable cost
Labour (140000) (140000) (168000)
Material cost (102000) (80000) Note1 (122400) Note4
Contribution 198000 220000 237600
Less Fixed cost
Administrative (40000) (40000) (40000)
Other (50000) (74000)
50000 + 24000
Note2
(95000)
50000 + 45000
Note5
Net Profit 108000 106000 102600
Note1 Because of the cheapest material, its cost has reduced to £80000.
Note2 The cheapest material suggestion by production managers increases the fixed cost by
£24000 i.e., inspection cost.
Note3 The marketing managers suggestion of campaign will increase sales by 20% which
became £528000 i.e., (440000 + 440000*20%).
Note4 The variable cost ratio on original estimates is 55% i.e., 242000/440000*100. So, the
variable cost on sales volume of £528000 will be £290400. The Labour cost is £168000 i.e.,
(140000/440000* 528000) and material cost is £122400 i.e., (102000/440000* 528000).
Note5 The extra fixed cost of £45000 will be required to cover the cost of campaign.
Formula of Break-even Sales in £ = Fixed cost/ Contribution margin
Sales 440000 440000 528000 Note3
Less Variable cost
Labour (140000) (140000) (168000)
Material cost (102000) (80000) Note1 (122400) Note4
Contribution 198000 220000 237600
Less Fixed cost
Administrative (40000) (40000) (40000)
Other (50000) (74000)
50000 + 24000
Note2
(95000)
50000 + 45000
Note5
Net Profit 108000 106000 102600
Note1 Because of the cheapest material, its cost has reduced to £80000.
Note2 The cheapest material suggestion by production managers increases the fixed cost by
£24000 i.e., inspection cost.
Note3 The marketing managers suggestion of campaign will increase sales by 20% which
became £528000 i.e., (440000 + 440000*20%).
Note4 The variable cost ratio on original estimates is 55% i.e., 242000/440000*100. So, the
variable cost on sales volume of £528000 will be £290400. The Labour cost is £168000 i.e.,
(140000/440000* 528000) and material cost is £122400 i.e., (102000/440000* 528000).
Note5 The extra fixed cost of £45000 will be required to cover the cost of campaign.
Formula of Break-even Sales in £ = Fixed cost/ Contribution margin
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Formula of Margin of safety = Actual Sales value – Break-even sales
Particulars Original Estimates
(£)
Production manager
suggestion
(£)
Marketing manager
suggestion
(£)
Actual Sales 440000 440000 528000
Break-even
Sales
200000
(90000/45%)
228000
(114000/50%)
300000
(135000/45%)
Contribution
margin
45%
(198000/440000*100)
50%
(220000/440000*100)
45%
(237600*528000*100)
Margin of
safety
240000
(440000 - 200000)
212000
(440000 - 228000)
228000
(528000 - 300000)
b) Recommendation on adoption of Plan
From the above calculation, it is recommended to the Mansleep Plc. that they must
adopt the original plan rather than the plan suggested by the production and marketing
managers. It is because the company will earn 108000 profits from original plan and 106000
and 102600 profits from the plan suggested by the production and marketing manager
respectively. The break-even sales are minimum in original plan and margin of safety is
highest in same as compared to other suggestions. That’s why the company must go with the
original plan only in order to improve its business profitability (Sintha, 2020). It is because
the profit will earn by company at the level where the break-even sales is lowest from all and
margin of safety is highest from all.
c) Factors that must be consider by Mansleep Plc. management in above case
Despite, cost and revenue there are many factors which must be consider by the
management in order to make a perfect and suitable decision. This include the Market
demand because any product sales only going to increase if the customers are attracted with
Particulars Original Estimates
(£)
Production manager
suggestion
(£)
Marketing manager
suggestion
(£)
Actual Sales 440000 440000 528000
Break-even
Sales
200000
(90000/45%)
228000
(114000/50%)
300000
(135000/45%)
Contribution
margin
45%
(198000/440000*100)
50%
(220000/440000*100)
45%
(237600*528000*100)
Margin of
safety
240000
(440000 - 200000)
212000
(440000 - 228000)
228000
(528000 - 300000)
b) Recommendation on adoption of Plan
From the above calculation, it is recommended to the Mansleep Plc. that they must
adopt the original plan rather than the plan suggested by the production and marketing
managers. It is because the company will earn 108000 profits from original plan and 106000
and 102600 profits from the plan suggested by the production and marketing manager
respectively. The break-even sales are minimum in original plan and margin of safety is
highest in same as compared to other suggestions. That’s why the company must go with the
original plan only in order to improve its business profitability (Sintha, 2020). It is because
the profit will earn by company at the level where the break-even sales is lowest from all and
margin of safety is highest from all.
c) Factors that must be consider by Mansleep Plc. management in above case
Despite, cost and revenue there are many factors which must be consider by the
management in order to make a perfect and suitable decision. This include the Market
demand because any product sales only going to increase if the customers are attracted with
its no matter how much cost the company reduce. Another factor is pricing strategy where the
management need to analyse the customers reaction over the different prices and adopt the
best strategy such as value-based pricing (Winda, 2018). The fixed cost must be managed by
the management because if any sales increment causes double increment in fixed cost than
earning the profit will not be possible. So, this factor must be considered by the company’s
management while suggesting any plan because the ultimate goal of the company is profit
maximization.
d) Benefits and Limitations of Break-even model
Benefits
It basically helpful for measuring the profit and losses of the business on the different
level of production as well as sales.
It also helpful to identify and predict the selling price changes and its effect over the
business profitability.
This reflects the real profit earning of the company because it distributes the total cost
into fixed and variable by analysing the relationship between the same (Noviani and
Santoso, 2021).
Not only that, the break-even model and marginal costing tool helps the company in
understanding and predicting the effect of changes in the variable cost over the
business performance.
Limitations
The profits calculation under this model is not same in reality because of the
assumption that selling price remain constant at all level of the output.
Here, this model also assume that the production and sales remain same without the
concept of opening and closing stock along with the work-in-progress. And this is not
possible in reality.
This is quite time consuming for the company and the impact of which sometime
decision-making process get delay.
It can be applying only to a single product or a single product mix. When the
company deals with more than one product application of this model is not suitable
(Rahmann and et.al., 2017).
management need to analyse the customers reaction over the different prices and adopt the
best strategy such as value-based pricing (Winda, 2018). The fixed cost must be managed by
the management because if any sales increment causes double increment in fixed cost than
earning the profit will not be possible. So, this factor must be considered by the company’s
management while suggesting any plan because the ultimate goal of the company is profit
maximization.
d) Benefits and Limitations of Break-even model
Benefits
It basically helpful for measuring the profit and losses of the business on the different
level of production as well as sales.
It also helpful to identify and predict the selling price changes and its effect over the
business profitability.
This reflects the real profit earning of the company because it distributes the total cost
into fixed and variable by analysing the relationship between the same (Noviani and
Santoso, 2021).
Not only that, the break-even model and marginal costing tool helps the company in
understanding and predicting the effect of changes in the variable cost over the
business performance.
Limitations
The profits calculation under this model is not same in reality because of the
assumption that selling price remain constant at all level of the output.
Here, this model also assume that the production and sales remain same without the
concept of opening and closing stock along with the work-in-progress. And this is not
possible in reality.
This is quite time consuming for the company and the impact of which sometime
decision-making process get delay.
It can be applying only to a single product or a single product mix. When the
company deals with more than one product application of this model is not suitable
(Rahmann and et.al., 2017).
Application of Breakeven model in marginal costing and Mansleep Plc. business
strategy
Break-even point is a sales value where the total fixed cost is equal to its contribution
and the impact of which the company neither earn profit nor incur loses. While the margin of
safety is a level above the break-even sales in which the company earn profit from the sales
revenue. So, with the application of this model as a strategy within the business, the
Mansleep Plc. can understand and determine how many units the company need to produce
and sale in order to earn profit. The contribution concept helps the company in understanding
the relation between the variable cost and sales. And the impact of which the company put
more focus on its variable cost reduction rather than fixed cost. It is because fixed cost
remains constant over the period of time. The application of break-even model also helps the
Mansleep company in identifying that profit will not earn at all level and identify exact units
the company need to sale for profit earning as well as maximization (Ryan Hidayat Ramdani,
2021). Along with that this tool is also helpful for providing the motivation to the employees
especially the sales staffs because it helps them to analyse the profit at different sales point
and identifying the area which causes loss. The application of break-even sales is helpful for
the company which sales only single product in identifying the margin of safety and helps the
business to set the realistic, achievable targets for the employees.
CONCLUSION
Costing analysis is a process that is ability to analysis and ascertains the cost incurred
in delivering the certain operations. The cost of the company is segregated into the fixed cost
and the variable nature of cost. Fixed cost remains unchanged irrespective of the time and the
level of operations but on the other hand variable cost changes with the pace of time,
production and all other elements. The break even is a cost that is a point where company
derive all its spending over the production. This is a point where company gain no profit and
no loss kind of situation in business. The role of breakeven is very significant in the business
progression of company as it could completely influence the business performance of the
organisation.
strategy
Break-even point is a sales value where the total fixed cost is equal to its contribution
and the impact of which the company neither earn profit nor incur loses. While the margin of
safety is a level above the break-even sales in which the company earn profit from the sales
revenue. So, with the application of this model as a strategy within the business, the
Mansleep Plc. can understand and determine how many units the company need to produce
and sale in order to earn profit. The contribution concept helps the company in understanding
the relation between the variable cost and sales. And the impact of which the company put
more focus on its variable cost reduction rather than fixed cost. It is because fixed cost
remains constant over the period of time. The application of break-even model also helps the
Mansleep company in identifying that profit will not earn at all level and identify exact units
the company need to sale for profit earning as well as maximization (Ryan Hidayat Ramdani,
2021). Along with that this tool is also helpful for providing the motivation to the employees
especially the sales staffs because it helps them to analyse the profit at different sales point
and identifying the area which causes loss. The application of break-even sales is helpful for
the company which sales only single product in identifying the margin of safety and helps the
business to set the realistic, achievable targets for the employees.
CONCLUSION
Costing analysis is a process that is ability to analysis and ascertains the cost incurred
in delivering the certain operations. The cost of the company is segregated into the fixed cost
and the variable nature of cost. Fixed cost remains unchanged irrespective of the time and the
level of operations but on the other hand variable cost changes with the pace of time,
production and all other elements. The break even is a cost that is a point where company
derive all its spending over the production. This is a point where company gain no profit and
no loss kind of situation in business. The role of breakeven is very significant in the business
progression of company as it could completely influence the business performance of the
organisation.
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REFERENCES
Books and journals
Aillón, H. S., Rocha, W. and Marques, K. C. M., 2018. DEINSTITUTIONALIZATION OF
ACTIVITY BASED COSTING: ANALYSIS FROM THE NEW INSTITUTIONAL
SOCIOLOGY PERSPECTIVE. Contabilidade Vista & Revista. 29(1). pp.101-129.
Klimaitienė, R. and Kundzelevičius, R., 2020. Implementationof time-driven activity-based
costing in weaving servicecompany. Science and studies of accounting and finance:
problems and perspectives. 202., vol. 14, no. 1, p. 24-34.
Noviani, R. and Santoso, A., 2021. Analisis Break Even Point dan SWOT Pada Usaha
Wedang Warok. ISOQUANT: Jurnal Ekonomi, Manajemen dan Akuntansi. 5(1).
pp.68-80.
Pietrzak, Ž., Wnuk-Pel, T. and Christauskas, Č., 2020. Problems with activity-based costing
implementation in Polish and Lithuanian companies. Inžinerinė ekonomika, pp.26-
38.
Rahmann, C. and et.al., 2017. Break-even points of battery energy storage systems for peak
shaving applications. Energies. 10(7). p.833.
Ryan Hidayat Ramdani, R., 2021. Analisis Break Even Point pada Best City Hotel
Yogyakarta Tahun 2020 (Doctoral dissertation, Universitas Teknologi Yogyakarta).
Saridaki, M. and Haugbølle, K., 2019, May. Identifying contradictions of integrating life-
cycle costing in design practices. In 10th Nordic Conference on Construction
Economics and Organization. Emerald Publishing Limited.
Sintha, L., 2020. Importance of Break-Even Analysis for the Micro, Small and Medium
Enterprises. International Journal of Research-Granthaalayah. 8(6).
Situmorang, B., 2020. Analysis of Activity Based Costing Method as the Basis Determination
of Hospital Services Rates. In Conference Series (Vol. 3, No. 1, pp. 16-28).
Winda, S. N., 2018. Analisis Break Even Point (BEP) Sebagai Alat Perencanaan Laba
Perusahaan Pada PT. Madubaru PG/PS Madukismo (Doctoral dissertation,
Universitas Teknologi Yogyakarta).
Gogtay, N. J. and Thatte, U. M., 2017. Principles of correlation analysis. Journal of the
Association of Physicians of India, 65(3), pp.78-81.
Camilleri, M. A. ed., 2018. Strategic perspectives in destination marketing. IGI Global.
Felix, L., 2021. Effective E-commerce Marketing Strategies for Small Online Retail
Businesses: An Exploratory Case Study (Doctoral dissertation, University of
Phoenix).
Tong, S., Luo, X. and Xu, B., 2020. Personalized mobile marketing strategies. Journal of the
Academy of Marketing Science, 48(1), pp.64-78.
Books and journals
Aillón, H. S., Rocha, W. and Marques, K. C. M., 2018. DEINSTITUTIONALIZATION OF
ACTIVITY BASED COSTING: ANALYSIS FROM THE NEW INSTITUTIONAL
SOCIOLOGY PERSPECTIVE. Contabilidade Vista & Revista. 29(1). pp.101-129.
Klimaitienė, R. and Kundzelevičius, R., 2020. Implementationof time-driven activity-based
costing in weaving servicecompany. Science and studies of accounting and finance:
problems and perspectives. 202., vol. 14, no. 1, p. 24-34.
Noviani, R. and Santoso, A., 2021. Analisis Break Even Point dan SWOT Pada Usaha
Wedang Warok. ISOQUANT: Jurnal Ekonomi, Manajemen dan Akuntansi. 5(1).
pp.68-80.
Pietrzak, Ž., Wnuk-Pel, T. and Christauskas, Č., 2020. Problems with activity-based costing
implementation in Polish and Lithuanian companies. Inžinerinė ekonomika, pp.26-
38.
Rahmann, C. and et.al., 2017. Break-even points of battery energy storage systems for peak
shaving applications. Energies. 10(7). p.833.
Ryan Hidayat Ramdani, R., 2021. Analisis Break Even Point pada Best City Hotel
Yogyakarta Tahun 2020 (Doctoral dissertation, Universitas Teknologi Yogyakarta).
Saridaki, M. and Haugbølle, K., 2019, May. Identifying contradictions of integrating life-
cycle costing in design practices. In 10th Nordic Conference on Construction
Economics and Organization. Emerald Publishing Limited.
Sintha, L., 2020. Importance of Break-Even Analysis for the Micro, Small and Medium
Enterprises. International Journal of Research-Granthaalayah. 8(6).
Situmorang, B., 2020. Analysis of Activity Based Costing Method as the Basis Determination
of Hospital Services Rates. In Conference Series (Vol. 3, No. 1, pp. 16-28).
Winda, S. N., 2018. Analisis Break Even Point (BEP) Sebagai Alat Perencanaan Laba
Perusahaan Pada PT. Madubaru PG/PS Madukismo (Doctoral dissertation,
Universitas Teknologi Yogyakarta).
Gogtay, N. J. and Thatte, U. M., 2017. Principles of correlation analysis. Journal of the
Association of Physicians of India, 65(3), pp.78-81.
Camilleri, M. A. ed., 2018. Strategic perspectives in destination marketing. IGI Global.
Felix, L., 2021. Effective E-commerce Marketing Strategies for Small Online Retail
Businesses: An Exploratory Case Study (Doctoral dissertation, University of
Phoenix).
Tong, S., Luo, X. and Xu, B., 2020. Personalized mobile marketing strategies. Journal of the
Academy of Marketing Science, 48(1), pp.64-78.
Quaye, D. and Mensah, I., 2019. Marketing innovation and sustainable competitive
advantage of manufacturing SMEs in Ghana. Management Decision.
advantage of manufacturing SMEs in Ghana. Management Decision.
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