Business Analytics: Benefits and Limitations of Break-even Analysis

This document discusses the concept of business analytics and its application in strategic decision-making. It includes a mathematical model to calculate profit or loss, a graph with spreadsheet, correlation coefficient analysis, scatter diagram, breakeven analysis, and a critical analysis of the benefits and limitations of the breakeven model. The document also provides insights into the relationship between advertising expenses and sales, as well as the determination of breakeven point and target profit.

Business Analytic

Contents
INTRODUCTION...........................................................................................................................3
Question 1........................................................................................................................................3
Mathematical Model:...................................................................................................................3
Calculate the profit or loss for BF Ltd:........................................................................................3
Draw a graph with a spreadsheet:................................................................................................4
Question 2........................................................................................................................................5
a. Correlation coefficient of advertising/sales and comment:......................................................5
b. Plot a scatter diagram:..............................................................................................................6
Analysis: ......................................................................................................................................6
c. ..................................................................................................................................................6
Question 3........................................................................................................................................6
Determine:....................................................................................................................................6
When company’s target profit for the year is £56000:.................................................................7
Break even chart:..........................................................................................................................7
Critically analyse the benefits and limitations of the breakeven model:......................................8
CONCLUSION..............................................................................................................................10
References......................................................................................................................................12

INTRODUCTION
Business Analytics (BA) relates to a procedure in which organisations use computational
tools and technology to analyse historical/past data in attempt to obtain new insights and enhance
strategic decision-making. Business Analytics is an iterative, methodological study of data of the
enterprise, with a focus on mathematical analysis. BA is used by businesses that employ data-
driven decision-makings (Evans, 2017). Data-driven businesses regard their data as corporate
commodity and aggressively pursue opportunities to transform it into competitive advantage.
Effective business analytics relies on data accuracy, on trained analysts who understand
technology and business, as well as on an organisational willingness to use data to generate
insights which inform strategic decisions. A great business analytics platform would be simple
enough for popular business customer, but that also allows more sophisticated customers to take
benefits of its capabilities. Organizations use Business Analytics to make choices based on
findings. Business analytics offers an outstanding analysis and insight into how businesses
should be more effective, which allows those companies to simplify their operations, as well as
to automate them. The study consists of different aspects of business analytics through different
practical tasks along with critical analysis of results.
Question 1
Mathematical Model:

Calculate the profit or loss for BF Ltd:
Budgeted
annual
output
120000
units
Fixed cost 40000
Variable
costs
0.5
Sales price 1
Units Rate Amounts
Sales 120000 1 120000
Less: Variable
costs
120000 0.5 60000
Contribution [Sales less variable
costs}
60000
Less: Fixed costs 40000
Profit 20000
Draw a graph with a spreadsheet:
Units Rate Year
2021
Year
2022
Year
2023
Year
2024
Year
2025
Year 2026
Sales 120000 1 120000 126000 132300 138915 145860.
8
153153.8
Less: Variable
costs
120000 0.5 60000 66000 72600 79860 87846 96630.6
Contribution 60000 60000 59700 59055 58014.7
5
56523.19
Less: Fixed costs 40000 40000 40000 40000 40000 40000
Profit 20000 20000 19700 19055 18014.7
5
16523.19

Analysis: As shown in above graph there is increase in sales of 5% while increase in variable
costs is 10%. There is larger increment in costs as compare to increasement in variable costs due
to which overall profit and contribution figures. Notable aspect here is that fixed costs would not
be changed which lead to greater decrement in net profit figures. Analysis shows that there is
simultaneous increasing relation between sales and total costs while inverse relation between
sales and profits (Acito and Khatri, 2014).
Question 2
a. Correlation coefficient of advertising/sales and comment:
Correlation coefficients generally employed to calculate the frequency of the interaction between
the two factors. There are many forms of the coefficient of correlation, however Pearson's
is most common. Pearson's correlation (as well named Pearson's R) is correlation coefficient
widely used for linear regression (AUJIRPONGPAN and HAREEBIN, 2020).
Correlation coefficient equal to 1 means that with each positive increases in one dimension, there
is positive increase in specified proportion in other. For e.g., shoe sizes are (almost) perfectly
associated with the length of the foot.

Correlation coefficient equal to -1 implies that there is negative decline in fixed proportion
in other for any positive improvement in one component. For e.g., volume of gas in tank declines
in perfect proportion to rpm.
Zero implies that there's no positively or negatively change on any increase. The pair are just not
linked.
Year Advertisin
g
expenditur
e
Sales
revenu
e
xy x2 y2
2021 2 60 120 4 3600
2022 5 100 500 25 10000
2023 4 70 280 16 4900
2024 6 90 540 36 8100
2025 3 80 240 9 6400
20 400 1680 90 33000
r = [n(Σxy) -
(Σx)(Σy)]/√[nΣx2 - (Σx)2]
[nΣy2 - (Σy)2]
r = (5 * 1680 - 20 * 400)/√(5*90 - 20*20) *
(5*33000 - 400*400)
r = 400 /√250000
r = 400/500
r = 0.8
Analysis: The correlation among data sets acts as an indicator about how well these respond to
each other. The most famous indicator of correlations in statistics is Pearson Correlation. The
complete name of product is Pearson Moment Correlation. In the scenario of positive correlation,
plotted figures are separated from lower left-side corner to upper right-side corner (in general
fashion of being uniformly spaced along straight line with positive sloping) as well as in case
of negative correlation, plotted pointers are scattered out along straight line with negative
slope) upper left-side to lower right. This indicates a linear relationship among two given data
sets. A positive result i.e. 0.8 of correlation coefficient depicts that increase in first variable i.e.
advertisement expenses corresponds to increase in second variable i.e. sales, consequently
implying direct relationship among the variables.

b. Plot a scatter diagram:
Scatter Diagram is convenient statistical methods for analyzing the association of two
different variables as its name suggests, it is shape of sheet of paper over which data points
referring to variables of interests are distributed. Based on the structure of the pattern created by
the data points on this sheet of paper, the relationship between two variables could be calculated
and the most effective correlation analysis method could be applied (Fernando and Engel, 2018).

Analysis:
Above presented chart shows that there are highest sales i.e., 100000 in year 2022 while
in this year advertisement expense is 5000. Whereas there is highest advertisement expense is
6000 in year 2024 and in this year, sales are 90000. There is lowest advertisement expense of
2000 in year 2021 while also lowest sales is in this year i.e. 60000.
c.
It has been analyzed that when advertisement expense is lower than sales will also goes down.
Thus here it is advisable to marketing manager should control advertisement expense and focus
on replacing or improving exiting marketing strategy to boost sales. Marketing manager should
adopt other effective marketing strategy to gain competitive advantages because new effective
marketing strategy will minimize overall advertising expense and enhance sales level.
Question 3
Determine:
i. Breakeven point in terms of number of software programs sold:
Fixed costs / Contribution per unit = (80000 + 60000)/
640
218.75
ii. Margin of safety as a percentage of estimated sales:
= (Actual sales units - Break even sales units) / Actual sales units * 100
(640 - 218.75) / 640 *100
65.82031
When company’s target profit for the year is £56000:
i.
Units Rate
Sales 640 600 384000
Less: Variable costs
Labor 640 200 128000
Materials 640 40 25600
Variable overheads 640 10 6400
Contribution 224000
Less: Fixed costs
Administration 80000
Selling and distribution 60000
Profit 84000

At the estimated sale, profit will be 84000 while targeted profit is 56000 this shows that
estimated sales will be sufficient to attain such target.
ii.
Target Profit 56000
Fixed Costs
Administration 80000
Selling and
distribution
60000
196000
Variable costs
Labor 128000
Materials 25600
Variable overheads 6400
Expected sales 356000
Break even chart:

Critically analyse the benefits and limitations of the breakeven model:
Break-even evaluation is relation among expense amount and benefit at varying stages of
operation, with focus on break stage This is when company receives neither profits nor loss,
whenever the total amount of money earned from sales/revenue is equivalent to total amount of
money expended on production of the goods for selling. Retailers employ this crucial definition
to recognize how many units have to be produced in order to fulfill minimum prices, and
suppliers utilize it to measure the no. of units that have to be assembled and sold over that time.
Note that break-even point matters great deal, because it is point when a project or company or a
commodity becomes economically feasible (Tan and et.al., 2016). The break-even measurement
offers the business a glimpse of future. All costs which ought to be charged are incurred, for
instance, the money earned the estimated return after risks change as well as opportunity
costs also paid. At this level, the company doesn't really show no loss or no profit. Break-even
assessment is a really crucial and valuable method for financial reporting and monitoring. The
below are the advantages of break-even analysis:
 This study helps to allow a decision between two options to take and to purchase.
If variable cost is smaller than the amount to be charged/paid to outside source, it could
be cheaper to produce than to purchase.
 The C-V-P study aimed to schedule the output of goods for the highest contribution to
the profit sum as well as fixed costs.
 As cost management system, the C-V-P evaluation may be employed to spot insidious
upward changes in costs which would otherwise go overlooked (Wixom, Yen and Relich,
2013).
 Break-even research offers an interpretation of the actions of income in regard to
production. This awareness is essential in the preparation of a business 's financial
framework.
 When a rational base with subjective observation is accessible, the break-even study
provided financial management also with details that is valuable in decision-making
practices.

 Break-even evaluation offers a much more consistent foundation on which to value items.
Look at the present financial condition to see how patient one can continue to be
whenever it gets to hitting break-even level.
 In order to set the team's realistic revenue goals, break-even review may also be an
outstanding instrument. It will still be simpler to determine on sales expectations when
one have a specific number and timeline.
 Often corporate innovations are not expected to be followed. Break-even evaluation will
help reduce the risk through avoiding non-profitable investments or products
(AUJIRPONGPAN and HAREEBIN, 2020).
 Break-even measurement is also a core component in business planning. It should be
remembered. You're likely to need break-even review if you need to get financing
for organization or start-up. Furthermore, a sustainable break-even level will make easier
to take on additional funding or debts.
Limitations: The following drawbacks of break-even evaluation must be taken into consideration
when using this method:
 However, this analysis of the tells break-even, this doesn't show how likely it would be.
Moreover, demand is not predictable and though assume there is market void, break-even
point might be much more optimistic than originally expected.
 The precision of break-even analysis depends on the precision of used data. If the
estimates are incorrect or cost is varying, arsenal's break-even analysis might not be most
effective method (Cazier, Cech and Spaulding, 2015).
 For organizations for single price level break-even analysis works easiest. If there have
several goods at many prices, it might be too easy to analyze break-even with specific
needs. It is also important to note that costs will shift, so it could be appropriate to review
and modify the break-even point at later stage.
 Some costs including their elements do not come into neatly compartmentalized fixed or
variables cost categories since they have the features of all kinds.

 If a corporation offers a variety of items, the accounting analyst must plan and
review number of profit-charts covering consolidated divisions of independent
operations.
 A break-even map reflects a short-term, stagnant relationship between costs and
production, and quite easily becomes redundant.
 Relationships shown in break-even map do not benefit both stages of activities. Costs
strive to be greater than seen on static break-even map while plant's output is close to
the 100percent of total of its efficiency (Duan and Xiong, 2015).
 Frequent fluctuations in the sale price of the goods have an effect on the efficiency
of break-even study.
 The costs of securing funds to grow is overlooked in break-even graph. The assumption
that competing entities are not included in the calculation is another constraint on break-
even analysis. New industry entrants can impact with product demands or lead to price
changes that are probable to impact break-even.
CONCLUSION
From above study this has been analyzed that while selecting business analytics tool,
companies should recognize the sources from which they can draw data, the quality of data they
will analyse and the accessibility of data. Business Analytics further helps businesses to simplify
their whole decision-making processes in order to respond in actual time if necessary. This is no
secret that data-driven businesses typically outperform their peers by using market analytics.
This is because market analytics offer insights into them; why such results are obtained, how to
discover more productive business operations, and even forecast the probability of certain
outcomes. Business analytics therefore provides sufficient assistance and protection for
organizations that wish to make the best choices proactively.

References
Books and Journals:
Evans, J.R., 2017. Business analytics (p. 656). London: Pearson.
Acito, F. and Khatri, V., 2014. Business analytics: Why now and what next?.
Wixom, B.H., Yen, B. and Relich, M., 2013. Maximizing value from business analytics. MIS
Quarterly Executive, 12(2).
Duan, L. and Xiong, Y., 2015. Big data analytics and business analytics. Journal of Management
Analytics, 2(1), pp.1-21.
AUJIRPONGPAN, S. and HAREEBIN, Y., 2020. The effect of strategic intuition, business
analytic, networking capabilities and dynamic strategy on innovation performance: The
empirical study Thai processed food exporters. The Journal of Asian Finance,
Economics, and Business, 7(1), pp.259-268.
Fernando, F. and Engel, T., 2018. Big Data and Business Analytic Concepts: A Literature
Review.
Tan, F.T.C., Guo, Z., Cahalane, M. and Cheng, D., 2016. Developing business analytic
capabilities for combating e-commerce identity fraud: A study of Trustev’s digital
verification solution. Information & Management, 53(7), pp.878-891.
AUJIRPONGPAN, S. and HAREEBIN, Y., 2020. The effect of strategic intuition, business
analytic, networking capabilities and dynamic strategy on innovation performance: The
empirical study Thai processed food exporters. The Journal of Asian Finance,
Economics, and Business, 7(1), pp.259-268.
Cazier, J., Cech, T. and Spaulding, T., 2015. Applying Business Analytic Methods To Improve
Organizational Performance In The Public School System.