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Financial Management: Break Even Analysis, Profit and Loss Statement, Balance Sheet Analyses

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Added on  2023-01-12

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This report provides an analysis of break even point, profit and loss statement, and balance sheet for a financial management case. It includes recommendations on which project to choose based on the analysis.

Financial Management: Break Even Analysis, Profit and Loss Statement, Balance Sheet Analyses

   Added on 2023-01-12

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B09888
FINANCIAL
MANAGEMENT
Financial Management: Break Even Analysis, Profit and Loss Statement, Balance Sheet Analyses_1
Table of Contents
EXECUTIVE SUMMARY.............................................................................................................3
BREAK EVEN ANALYSIS:..........................................................................................................4
Profit and Loss Statement and Balance Sheet Analyses:.................................................................7
Monthly cash flow for the first year of operation..........................................................................12
Projected annual cash inflows for 5 years.....................................................................................13
Cash required by Isaac to start new venture:.................................................................................16
Sensitivity analyses of both projects:............................................................................................19
Upfront fee for the exclusive rights to Alpen Choc:......................................................................21
RISK FACTOR ANALYSIS:........................................................................................................22
CONCLUSION AND RECOMMENDATION............................................................................23
REFERENCES..............................................................................................................................24
Financial Management: Break Even Analysis, Profit and Loss Statement, Balance Sheet Analyses_2
EXECUTIVE SUMMARY
This report is based on various financial elements such as break even analysis, profit and
loss statement, balance sheet, monthly cash flow and annual cash flows. The case
presented shows that Issac has provided not complete information’s; thus for calculation
purpose data is assumed. The transaction is carried out between two countries; Canada
and Germany. Due to different currencies; foreign currency exchange rate for one
Canadian dollar (CAD) is taken as 0.64 € Euro, all the transactions will be carried out in
Canadian dollar; because Issac is the citizen of Canada and balance sheet and cost of
operations has to be calculated for him. Alpen Choc. is chocolate manufacturer company
situated in Germany. It is also assumed that foreign exchange rate will be constant
throughout the year and no discount is allowed on currency exchange even on bulk
purchase. Average selling price is assumed as CAD 160 per kg and there’s no sales tax
for any transactions. It is believed that all interests on borrowing are paid on time or
there’s no outstanding interest. Cash flow is discounted at rate of 7% per annum
(assumption) because inflation rate is between 5.19% to 8.15%, therefore interest paid on
borrowings are taken as discounted rate for cash flows; all other factors such as
environment change, increase in demand, competitors entry and fluctuation in inflation
rate are remain constant. Total average monthly sales are taken as 400 kg per year; it is
the average of average of starting month sale 50 kg and ending month 750 kg. Company
will order monthly stock at a time. Issac has two alternatives; either sale through internet
or his friend Jade. For calculating equity capital at Liability side; it is assumed that Isaac
would invest whole retirement amount into the business.
Financial Management: Break Even Analysis, Profit and Loss Statement, Balance Sheet Analyses_3
BREAK EVEN ANALYSIS:
Break-even Analysis (BEP): Break-even analysis shows a point of sale where company
attain the situation of no loss no gain; means it is a point where if company increases
sales, it will gain profit and moving below the point result in loss. In straightforward
words, the make back the initial investment point can be characterized as a point where
complete (costs) and all out deals (income) are equivalent (Brigham and Ehrhardt, 2013).
Break-even analysis shows the original investment point can be portrayed as a point
where there is no net benefit or deficit. The firm just earns back the original investment.
Issac has two alternatives which is either he can sale 4800 kg annual chocolates through
internet or 1200 boxes annually chocolate to his friend Jade.
Project 1
4800 kg Annually CAD CAD
Selling price per kg 160 768000
Less: Variable cost per
kg:
Packaging and Shipping 6
Purchases 113
Handling fee @ 1.2%
per sale 1.920 121 580416
Contribution per Kg 39 187584
Period cost (Fixed
Cost):
Total cost to sales
(annual) @ CAD
2,500/month
-
30000
Rent @ CAD
3,500/month
-
42000 72000 72000
Net Profit 115584
Working Note:
Handling fee per order (400 kg at a
time) =
400 kg × 160 × 1.2%
= 768
Per Kg Handling fee CAD 768/400 Kg = CAD
Financial Management: Break Even Analysis, Profit and Loss Statement, Balance Sheet Analyses_4
= 1.92/Kg
Purchases is converted into Canadian currency from euro which is CAD 113 per kg
Break even point (Units) =
Fixed cost/ Contribution per
unit
= CAD 72000/39 per Kg
= 1846
Approx. 1846 units
Break even point (CAD) = Breakeven point (units) × Sales
price per kg
= 1846 × 160 per kg
= 295360
CAD 295360
Interpretation: On the basis of above calculation; it can be interrelated that
Isaac is facing total net annual gain of approximate CAD 295360. Because it’s total
annual net sales is more above than the break-even point of 1846 kg and its total
breakeven sales is below CAD 74,880. If Isaac manages to increase its sales above break-
even point then it will be rewarded for every extra per kg sale. For handling charges per
order calculation; size of every order is taken as 400 kg per month, number of order per
year will be 12 (Brigham, 1996).
Project 2
1200 boxes annually CAD CAD
Selling Price per box 45 54000
Less: Variable Cost / box
Purchases 28
Boxes and Decorative cost/box 8 43200
Contribution cost /box 9 10800
Period cost (Fixed Cost):
Assistant Expenses Annually @ CAD
500/month 6000 6000
Net Earnings 4800
Financial Management: Break Even Analysis, Profit and Loss Statement, Balance Sheet Analyses_5
Working Note:
Total sales = 45 × 1200 =
CAD
54000
Total Variable cost = 8 × 1200
=
CAD
44400
Purchase price is divided by to get per box
rate
Break even point (Units) =
Fixed cost/ Contribution per
unit
= CAD 6000/9 per Kg
= 667
Approx. 667 boxes
Break even point (CAD) = Breakeven point (units) × Sales
price per kg
= 667 × 45 per box
= 30015
CAD 30015
Interpretation: Isaac will attain the point of no gain no loss if he sale 667 boxes in a year;
in value this can be achieve he generates total sales of CAD 30015 Canadian dollars in a
year. He’s income statement through marginal costing method shows that; Isaac is
generating annual revenue of around CAD 38400 Canadian dollars. With every increase in
break-even point will generate more revenue (Ehrhardt and Brigham, 2011).
Which project should be chosen:
After matching both project 1 and 2; it is recommended that in long run, Isaac should go
with project 1 (selling through internet); because earnings from this project is almost
double of project 2. But if Isaac could carry both the projects at a time; it will not increase
the burden but average earning from both the project together will decreased (McMahon
Financial Management: Break Even Analysis, Profit and Loss Statement, Balance Sheet Analyses_6

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