Evaluating Break-even Point and Budgeted Loss for a Business Unit

The provided table indicates that the business unit can achieve break-even levels at 15,000 units. The organization ends up with budgeted loss at the current selling and cost price. To increase profitability, the management should consider increasing the selling price or reducing costs. A decision to increase the selling price by 10% would minimize the loss and ensure no loss is incurred. Therefore, it is recommended that the business unit increases its selling price by 10%. This approach can help achieve a more profitable scenario.

Finance in hospitality

Table of Contents
Introduction................................................................................................................................1
Task 1.........................................................................................................................................1
1.1 Sources of funding within business and service industry................................................1
1.2 Methods of generating income for a large chain of restaurants.......................................2
Task 2.........................................................................................................................................2
2.1 Elements of cost, gross profit percentages.......................................................................2
2.2 Methods of controlling stock and cash in a business and service environment...............3
Task 3.........................................................................................................................................4
3.3 Process and purpose of budgetary control.......................................................................4
3.4 Variance analysis of Yuri’s budget..................................................................................5
Task 4.........................................................................................................................................5
3.1 Source and structure of trial balance................................................................................5
3.2 Business accounts, adjustments and notes.......................................................................6
4.1 Ratio analysis...................................................................................................................8
4.2 Recommendations for future management strategies......................................................9
Task 5.........................................................................................................................................9
5.1 Classification of costs......................................................................................................9
5.2 & 5.3 Contribution per unit and break-even analysis....................................................10
Conclusion................................................................................................................................11
References................................................................................................................................12

List of tables
Table 1: Trial balance’s performa..............................................................................................6
Table 2: Income statements - adjustments.................................................................................6
Table 3: Balance sheet - adjustments.........................................................................................7
Table 4: Ratio Analysis for R. Riggs.........................................................................................8
Table 5: Calculation of Variable Cost per Unit.......................................................................10
Table 6: Sensitivity analysis.....................................................................................................10

INTRODUCTION
In present scenario, hospitality industry is growing at significant pace. The growth in
industry needs to be accompanied by its financial or monetary growth (Helfrit, 2001). It is
essential for businesses in hospitality sector to plan their financial resources in an effective
manner. The financial planning involves proper allocation of financial resources and efficient
forecasting future. The report proposed herewith emphasizes on providing an in-depth
overview of financial planning within hospitality sector. The research report presented
herewith helps in generating deep understanding of financial planning within hospitality
industry.
TASK 1
1.1 Sources of funding within business and service industry
The organization needs to acquire funds through suitable sources of finance so as to
meet its monetary requirements. The varied ranges of financial sources that are available to
businesses in hospitality sector are described underneath in detail.
Bank loans: The organization can acquire funds through bank loans so as to meet all
kind of financial requirements (Nikbakht, 2006). The banking units in present scenario tend
to provide varied range of loan facilities. This in turn helps in meeting short to long-term
financial requirement on part of the organization.
Equity capital: The businesses in hospitality sector can acquire funds through issuing
equity shares. The financing option helps in meeting business requirement for long-run. The
acquisition of funds through equity capital does not involve regular interest payments.
However, financing option results in dilution of ownership among shareholders. It can be
therefore claimed that the source of financing helps in meeting business requirement for long
run.
Retained earnings The businesses in hospitality sector can utilize funds that are saved
as a part of reserves and surplus. It is the source of funding that helps in meeting financial
requirement at free of cost. Henceforth, it is considered to be suitable to meet financial
requirements in short and very-short run.
Issue of debentures: The large-scale businesses within hospitality industry can issue
debentures so as to meet financial requirement (Grahl, 2009). It is the costlier source of
finance that helps in meeting business requirement for long-run.
The organization in present case needs to acquire £ 50000 for purchase of machinery.
The bank loans are considered to be suitable source of financing for acquisition of machinery.
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It is through bank loans that the hotel unit is able to acquire funds so as to purchase
machinery.
1.2 Methods of generating income for a large chain of restaurants
It is essential for businesses to generate sufficient amount of income on continuous
basis. The large chain of restaurants helps can generate income through following ways:
Product development: The restaurant unit can offer wide range of eatables so as to
suit taste buds of customers. This in turn helps in attracting large number of customers and
increasing profitability on part of the organization.
Market expansion in foreign markets: The large-scale restaurant units can expand
their operations in foreign markets. In present scenario, Asian markets offer wide range of
growth opportunities (Deakins, Galloway and Morrison, 2002). It can be therefore claimed
that expansion in foreign markets helps in generating more amount of income on part of
restaurant unit.
Market expansion in domestic markets: Opening up more number of branches in
domestic country also helps in generating of additional income. Henceforth, opening up of
more branches in domestic country also leads to increasing profitability.
Franchising: The large chain of restaurants can offer franchisee to open up new
branches. This in turn helps in increasing revenue and income earned on part of the restaurant
unit. The restaurant units can therefore earn additional income by offering franchising to
different businesses.
TASK 2
2.1 Elements of cost, gross profit percentages
Elements of cost
The businesses tend to incur varied range of costs while carrying its manufacturing
and operations. The different elements of costs incurred on part of the organization includes
following elements:
Material costs: The costs incurred on part of the restaurant unit in acquiring raw
materials (Hirsch, 2000). The organization tends to incur sufficient amount of expenditure on
acquiring materials for supporting manufacturing process.
Labour costs: In order to support operations, the business unit needs to pay wages and
salaries to its employees. In case of hospitality sector, employees tend to represent the
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business unit. Henceforth, the organization needs to incur high amount of labour costs for
management of business operations.
Administrative and other expenses: The business unit needs to incur administrative
and other expenses apart from labour and material costs (Hildreth, 2004). The businesses in
hospitality sector needs to incur sufficient amount of administrative expenses for the purpose
of managing operations.
Gross profit percentage
The organization can judge its profitability by estimating gross profit ratio which
indicates percentage of profit earned after meeting all direct expenses (Friedlob and Schleifer,
2003). The formulas mentioned below helps in estimating gross and operating profit ratio as
mentioned underneath.
Gross profit ratio=Gross Profit
Net Sales ∗100
Operating profit ratio=Operating Profit
Net sales ∗100
Operating profit Ratio for marks and Spencer for 2013:
Operating profit ratio= 838.22
9382.37∗100
Operating profit ratio=8.93 %
As per the estimations, marks and Spencer has earned operating profit ratio of 8.93%.
It can be claimed that the organization is able to earn sufficient profitability after meeting all
direct expenses. However, the organization is able to increase profitability by reducing
operating and other business expenses.
2.2 Methods of controlling stock and cash in a business and service environment
In order to achieve operational excellence, the organization needs to adopt strict
control mechanism. The business unit needs to adopt appropriate strategies for controlling
stock and cash flow. The lists of techniques through which stock can be controlled within
business unit are described underneath in detail.
Economic order quantity: The organization needs to determine economic order
quantity that helps in determining level at which inventory needs to be re-ordered (Theeke
and Mitchell, 2008). It is through estimation of economic order quantity that the organization
is able to order appropriate quantity of inventory at adequate intervals.
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Just-in-time approach: The technique of just-in-time emphasizes on adopting real
time monitoring and controlling of cost. The approach emphasizes on fact that the
organization needs to continuous monitor all activities so as to identify variances. This in turn
helps in reducing costs to the maximum level. Just-in-time approach helps in monitoring and
controlling costs involved in business operations.
Re-order quantity: The methodology emphasizes on estimating the quantity that
should be ordered on regular intervals. It is through estimation of re-order quantity that the
organization is able to re-order appropriate levels of quantity (Deakins, Galloway and
Morrison, 2002). The acquisition of raw materials in adequate quantity helps in proper
inventory management within the organization.
LIFO (Last-in-first-out): The inventory management technique focuses on accounting
of inventory in a manner that the stock purchased at last is accounted for the first. The
methodology assumes that inventory that is arrived at last will be sold first. Henceforth, the
technique emphasizes on accounting in the manner whereby inventory that has been recently
purchased in accounted for first.
First-in-first out (FIFO): Another inventory management technique that is First-in-
first-out (FIFO) method emphasizes on accounting for inventories in a manner that the
inventory that is purchased first should be accounted for the first. The methodology takes into
consideration an assumption that the inventory is sold in order of its purchase. The
methodology helps in effective control of inventory within the organization.
In order to efficiently control inventory, the business unit can adopt response-based
supply chain instead of anticipation-based. In case of anticipation based supply chain, the
organization tends to predict or forecast its inventory requirements. It is on the basis of future
forecast that the stock is produced. Thereafter, the business unit waits for demand to arise in
the market. On other hand, response based supply chain emphasizes on taking orders in
advance. The inventory in case of response based supply chain is managed as per the orders
received by the organization. In recent times, the businesses majorly adopt response based
supply chain. It is through adoption of response based supply chain that the businesses are
able to minimize cost by maintaining adequate level of inventory.
It is seen that the organization can manage and control its inventory in an effective
manner. Moreover, the business unit needs to adopt strict control mechanism for its cash
collection and payment systems. The adequate level of liquidity helps the organization in
achievement of business objectives. Cash control mechanism and its different methods for the
organization are detailed underneath.
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Cash controlling methods: The business unit needs to control all kind of direct and
indirect expenses so as to meet long-term objectives. It is through adoption of strict control
mechanism that the organization is able to minimize costs and take appropriate measures
(Objectives of Financial Statement Analysis, 2015). This in turn helps in achieving
operational excellence and long-term business objectives. The organization needs to
continuously monitor all business activities. The continuous monitoring of operations and
cash inflow/outflow helps in adopting strict cash control mechanism. The business unit can
adopt following cash controlling mechanism so as to maintain liquidity.
 Dual control: As per the dual control system, the organization needs to employ
multiple employees for managing cash. It can be said that the business unit can
involve two employees for cash counting, generating receipts and checking deposits.
It is through involvement of more than one employee at cash department that the
organization is able to control and manage liquidity or cash balance within business
unit.
 Reconciliation: The business unit should adopt electronic system of recording
receipts and payments. It is through reconciliation of all records that the business unit
is able to monitor cash inflow and outflow. This in turn results in adopting strict cash
controlling mechanism within the organization.
The organization needs to also adopt cash controlling mechanisms so as to ensure
sufficient liquidity. In order to ensure sufficient inflow of cash, the organisation needs to
monitor all business activities and take appropriate measures to control cash expenditure.
The effective cash control mechanism is considered to improve liquidity of the business into
consideration.
TASK 3
3.3 Process and purpose of budgetary control
The organization needs to adopt budgetary control mechanism so as to achieve
benchmarks set. Budgetary control is a method in which budgets are prepared so as to
allocate financial resources. Moreover, it provides guidance to allocation of financial
resources and generation of sufficient level of profits. The purpose and process of budgetary
control is described underneath in detail.
Purpose of budgetary control
The budgets are prepared on part of the organization so as to achieve short-term and
long-term objectives. It is through budgetary control that the business unit is able to achieve
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pre-defined targets and benchmarks. The main purpose of budgetary control is to
appropriately allocate financial resources. It is through budgetary control that the
organization is able to earn sufficient profitability. The technique helps in increasing
efficiency and imbibing operational excellence within the organization. It can be said that
adoption of budgetary control mechanism results in optimum utilization of financial
resources within organization. The purpose of budgeting and budgetary control mechanism
is discussed underneath in detail.
Formal process of communication: It is through preparation of budgets that the top
management is able to communicate its objectives to middle and lower level. It can be
therefore said that preparation of budgets is an efficient way to communicate management’s
expectations to employees.
Bridging gap between short-term and long-term plans: The organization is able to
bridge gap that exists between long-term and short-term business objectives. It is through
preparation of budgets that the organization is able to bridge gap that exists between short-
term and long-term plans.
Continuous improvements in business operations: The budgetary control serves
purpose of continuous improvements in business operations. It is through continuous
improvements in business activities that the organization is able to achieve success in long-
run. The budgetary control mechanism helps in improving business performance on
continuous basis.
Achieving financial objectives: It is through preparation of budgets that financial
objectives of the organization are achieved. The organization is able to allocate financial
resources in an effective manner. It can be therefore said that the business unit is able to
achieve all its financial objectives through preparation of budgets.
It can be said that the budgetary control serves varied range of purpose for the
organization. The business unit is able to meet its objectives in an efficient manner through
preparation of budgets.
Process of budgetary control
The budgetary control technique needs to be implemented in a sequential procedure.
The complete step-by-step process of budgetary control mechanism is described underneath
in detail.
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Figure 1: Budgetary control process
The diagram presented above indicates the budgetary control process that is to be
adopted by the organization. The sequential procedure for formulation and control of budgets
is detailed underneath.
Evaluating past trend and forecasting future performance: The organization needs to
conduct an in-depth evaluation of past performance. It is through identification of past trend
that the future performance can be forecasted.
Preparation of budgets: The business unit needs to prepare budgets so as to allocate
financial resources in an effective. Moreover, it is through preparation of budgets that the
organization is able to anticipate future performance.
Measuring actual performance: It is essential to measure actual performance on
continuous basis. The business unit is able to identify variances in budgeted and actual
figures by measuring actual performance.
Identification of variances: First of all, the organization needs to identify variances by
mapping budgeted figures to that of actual figures (The Importance of a Budget. 2015). It is
through identification of variances that the organization is able to take appropriate measures.
Evaluation of variances identified: The business unit needs to understand nature of
variances identified. It is through investigation of nature of variances that the organization is
able to plan appropriate strategies.
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EvalautingpasttrendandforecastingfutureperformancePrepartionofbudgetsMeasuringactualperformanceIdentifyingvariancesEvaluatingvariancesidentifiedAdoptingcorrectivemeasures

Adoption of corrective measures: Finally, the organization needs to adopt appropriate
strategies for the purpose of bridging gap that exists in budgeted and actual outcomes. This in
turn helps in improving business performance and achieving long-term business objectives.
3.4 Variance analysis of Yuri’s budget
It is through variance analysis that the organization is able to identify loopholes into
operations. The case for Yuri, a cutlery manufacturer who produces spoon is unable to
achieve budgeted figures. The comparison between budgeted and actual figures for Yuri, a
cutlery manufacturer is presented in table underneath.
Budget Actual Variance
Units sold 1,00,000 75,000 (25,000)
Materials £ 15,000 22500 (7,500)
Direct labor £ 22,500 24375 (1,875)
As per the budgeted figures, the organization has expected to sell approximately
100000 units. However, the business unit is able to sell only 75000 units. It can be claimed
that organization is unable to achieve target by 25000 units. It is seen that the material and
labour costs has also exceeded the budgeted figures. It can be therefore said that the
organization is unable to achieve budgeted figures. The business unit has incurred additional
cost for manufacturing of lesser quantity. The organization needs to adopt strict control
mechanism so as to reduce cost of operations. Moreover, the business unit should promote
business offerings so as to increase revenue generated on annual basis.
The business unit is not able to meet its targets in a varied manner as indicated below
in detail.
Variance in direct expenses: It is essential for the organization to incur expenditure as
per the budgeted figures. It is seen that direct expenses in form of materials and direct labour
is incurred at higher levels. This in turn has resulted in incurring expenditure more than
budgeted figures.
Variance in gross profit: The gross profit earned on part of business unit will be less
than budgeted figures. This is due to reason that organization is unable to earn
expected/budgeted amount of revenue. Moreover, the business unit is going to incur
expenditure more than budgeted figures. This in turn results in earning of gross profit less
than actual figure.
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Variance in net profit: It is seen that reduced revenues and increased profits results in
reduction in gross profit. It can be therefore said that variances in gross profits leads to
variances in net profits. The business unit is therefore not able to earn expected or budgeted
profits.
It can be said that distinct set of variances occur in figures of revenue, direct
expenses, gross profit and net profit. In order to bridge the gap between actual and budgeted
figures, the organization should adopt strict control mechanism. The variances in budgeted
and actual figures indicate organization’s inefficiency in meeting its targets.
The variance can also be classified by distinguishing between usage and price
variance in the following manner.
Sales variance: The sales variance is a result of variance in number of units sold. The
organization has expected that it is going to sell approximately 100000 units. However, it is
able to sell 75000 units those results in variance of approximately 25000 units. The variance
in number of units sold in-turn results in variance in revenue. The organization is going to
earn revenue by selling adequate number of units. The reduction in number of units sold in
turn results in reducing overall sales revenue of the business unit. It can be therefore said that
the company is not able to achieve its target. The overall revenue is expected to decrease with
reduction in number of units sold. The sales variance is expected to incur due to reduction in
demand of the products into consideration. The business unit is unable to meet its expected
revenue due to decrease in demand or change in consumers’ preferences.
Material price variance: The business unit can incur material variance due to
reduction in material prices. It is with increase in prices of material that the organization ends
up with increase in actual expenditure. The material prices tend to increase with change in
rate of inflation. The rise in inflation results in increasing material price and expenditure on
part of the organization. Henceforth, the material price variance has been incurred on part of
the organization.
Material usage variance: The material usage variance refers to variance that arises as
a result of increase/decrease in usage of required materials. The business unit sometimes tend
to make additional utilization of quantity of materials. This in turn results in increasing
material variance. In present case, the business unit is incurring overall material variance of
7500 that includes material price and material usage variance. The business unit has utilized
additional materials in production of goods. Although demand has been reduced, material
usage has been increased on part of the organization. It is with increase in material usage and
price that overall expenditure on material has been increased.
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Labour rate variance: The business unit tends to incur variance as a result of increase
in wages or labour rates within an economy. The variance that arises as a result of increasing
wage rate is said to be labour rate variance. The prices of labor are expected to increase with
rise in rate of inflation. It is due to increase in wage rate that the variance has been occurred
on part of the organization in payments to labour.
Labour efficiency variance: The labour efficiency variance arises as a result of
reduction in efficiency of employees. It is with additional employment of human resource
that the organization incurs labour efficiency variance. The organisation in present case has
incurred labour variance of 1875 that comprises of labour rate and efficiency variances. The
business unit has made additional usage of labour at higher rate. This in turn results in
increase in labour efficiency variances.
TASK 4
3.1 Source and structure of trial balance
Trial balance is a financial statement that helps in summarizing business performance
at the end of the year. The recording within trial balance happens as per double entry book
keeping. The two sides of trial balance through which all financial transactions are as
follows: debit and credit. The financial transactions results in increasing value in the form of
profits or decreasing value in the form of losses. The Performa of trial bal ance is presented
underneath in detail.
Table 1: Trial balance’s performa
Trial balance as on 31st March 2014
Particulars Debit Credit
Bank Xxx
Accounts receivable Xxx
supplies Xxx
Office building Xxx
Bank loan` Xxx
Accounts payable Xxx
Mortgage payable Xxx
Total xxxx xxxx
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The Performa of trial balance presented above indicates that it helps in keeping record
of all financial transactions through debit and credit. The debit and credit side of trial balance
should map so as to indicate feasibility of all financial transactions.
3.2 Business accounts, adjustments and notes
The accounting standards that are developed at domestic and global level are based on
double entry book keeping. As per the accounting standards, every debit has a corresponding
credit entry and vice versa. It is essential for the organization to make proper recording of
transactions that are of financial nature. As an example, the revenue earned on part of the
business unit is recorded in income statement and there is a corresponding increase in cash
balance that is recorder in balance sheet. The adjustments as per given case in income
statement and balance sheet is presented underneath.
Table 2: Income statements - adjustments
Particulars Amount (in £’s)
Sales 157165.00
Less COGS (94520.00)
Gross profit 62645.00
Discounts received 160.00
Interest received from bank* 50.00
Operating income 62855.00
Expenses
Wages and salaries (31740.00)
Rent (3170.00)
Discount allowed (820.00)
Van running costs (687.00)
Bad debts (730.00)
Doubtful debt provision (91.00)
Accrued expenses paid* (200.00)
Depreciation (1630.00)
Total expenses (39068.00)
Net profit 23787.00
Table 3: Balance sheet - adjustments
Particulars Amount (in £’s)
Amount (in
£’s)
Fixed assets
Office furniture & van 6650.00
Less depreciation (1630.00)
Net fixed assets 5020.00
Additional furniture* 525.00
Total fixed assets 5545.00
Current Assets
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Stock 2400.00
Debtors 12316.00
Less provision for doubtful debts (496.00)
11820.00
Prepaid expenses 230.00
Cash at bank & hand 4424.00
Add Interest received* 50.00
Less accrued expenses paid* (200.00)
4274.00
Total current assets 18724.00
Total Assets 24269.00
Current Liabilities
Creditors 5245.00
Accruals 412.00
Creditors for furniture* 525.00
Total liabilities 6182.00
Equity capital
Capital 11400.00
Add Net profit 23787.00
less drawings (17100.00)
Total equity 18087.00
Total Liabilities & Equities 24269.00
The transactions marked as * represents adjustments that are to be made in income
statement and balance sheet. The adjustments are recorded on the basis of double entry book
keeping system. It is seen that the adjustments results in changing profitability and net worth
of the business into consideration.
4.1 Ratio analysis
Ratio analysis is considered to be the most important technique for the purpose of
analysing financial statements. It is through ratio analysis that the organization’s performance
can be compared over a period of time and within industry. The ratios for R. riggs are
estimated and presented in table underneath.
Table 4: Ratio Analysis for R. Riggs
(Amount in £’s)
Ratios Formula 2012
Profitability ratios
Gross profit 62645.00
Net profit 23787.00
Net Sales 157165.00
Gross Profit Ratio (Gross Profit/ Net Sales) *100 39.86 %
Net Profit Ratio (Net Profit/ Net Sales) *100 15.14 %
Liquidity ratios
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Current Assets 18724.00
Current Liabilities 6182.00
Closing Stock 2400.00
Current Ratio Current Assets / current Liabilities 3.03
Quick Ratio (Cu. Assets - Cl. Stock)/Cu. Liabilities 2.64
Efficiency Ratios
Purchases (COGS) 94520.00
Trade creditors 5245.00
Creditors turnover ratio
(Annual purchase/ Average trade
creditors)
18.02
times
Creditors turnover ratio (in
days) (365/creditors turnover ratio)
20.25
days
Sales 157165.00
Average accounts receivables 12316.00
Debtors turnover ratio Sales/ Average accounts receivables
12.76
times
Debtors turnover ratio(in days) (365/Debtors turnover ratio)
28.60
days
Cost of goods sold 22026.00
Inventory 2400.00
Inventory Turnover ratio (COGS/Inventory) 9.18 times
Inventory Turnover ratio (in
days) (365/inventory turnover ratio)
39.77
days
Profitability ratios: As per the profitability ratios, it is seen that the business unit is
earning gross profit margin of 39.86 %. However, the organization is able to earn net profit
margin of 15.14%. This in turn indicates that the organization has earned sufficient level of
gross profit margin due to lower level of cost of goods sold. However, high level of operating
and non-operating expenses results in reducing net profit margin. The organization can
control its indirect expenses so as to increase business profitability. Nevertheless, the
profitability ratio indicates that the organization is earning sufficient amount of profits during
the year.
Liquidity ratios: The liquidity ratios are calculated so as to ascertain availability of
cash to meet short term expenses (Wiedemann, 2009). As per the current and quick ratio, it
can be claimed that the organization is having sufficient amount of assets. The business unit
has high liquidity which helps in meeting all short-term obligations. It can be claimed that the
business unit is able to efficiently settle all short-term obligations within short-run.
Efficiency ratios: The efficiency ratios are calculated to ascertain efficiency with
which business operations can be judged. The turnover ratios indicate lower operating cycle
and prompt cash collection and payment. It can be said that the organization is conducting
operations with high proficiency.
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4.2 Recommendations for future management strategies
It is seen that the business unit is earning sufficient amount of gross profits. However,
the comparatively lower level of net profit margin indicates higher operating and non-
operating expenses. The organization needs to therefore adopt strict control mechanism so as
to control direct and indirect cost. Moreover, the organization should make optimum
utilization of current assets. As per the liquidity ratios, it can be claimed that the business unit
has large amount of cash lying with it. The organization can make optimum utilization of
resources by making utilization of current assets.
TASK 5
5.1 Classification of costs
Different types of costs that are incurred on part of the organization are classified and
described underneath in detail.
Fixed costs: The cost that remains constant throughout different levels of production
is termed as fixed costs (Theeke and Mitchell, 2008). It is through distribution of fixed costs
that the organization is able to take benefit of economies of scale.
Variable costs: The cost of production that increases with overall increase in
production is termed as fixed costs. The variable costs help in determining selling price that is
appropriate in generating sufficient profitability.
Semi-variable costs: The operational cost that is partly fixed and partly variable in
nature is termed as a semi-variable costs. It is the costs that involve components of both of
fixed and variable costs.
5.2 Contribution per unit and break-even analysis
The contribution and variable cost per unit is determined in table presented
underneath. Moreover, break-even points are calculated as a part of sensitivity analysis in
tables underneath.
Table 5: Calculation of Variable Cost per Unit
Particulars Amount
Sales Revenue 100000
Less Variable cost 80000
Contribution 20000
Less Fixed Costs 30000
Budgeted loss (10000)
No. of units 10000
Selling price each unit(Sales Revenue/ no. of units) 10
Variable cost per unit 8
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Contribution per unit 2
The table presented above indicates that per unit sell contributes £ 2 to net profit of
the organization. It can be claimed that at selling price of £ 10, per unit is contributing £ 2
towards net profit.
Table 6: Sensitivity analysis
Particulars
Original
scenario
Case 1
(10% decrease
in SP)
Case 2
(10% increase
in SP)
Case 3
(Increase in
variable cost)
Selling price per
unit 10 9 11 10
Variable cost per
unit 8 8 8 9.5
Unit contribution
margin 2 1 3 0.5
Contribution per
unit 20.00% 11.11% 27.27% 5.00%
Fixed Costs 30000 30000 30000 30000
Break even sales
(in units) 15000 30000 10000 60000
Breakeven point
(in value) 150000 270000 110000 600000
No. of units 10000 10000 10000 10000
Sales Revenue 100000 90000 110000 100000
Less Variable cost 80000 80000 80000 95000
Contribution 20000 10000 30000 5000
Less Fixed Costs 30000 30000 30000 30000
Budgeted loss (10000) (20000) 0 (25000)
As per the table presented above, it can be claimed that the business unit is able to
achieve break-even levels at 15000 units. Moreover, selling price indicates that the breakeven
point changes with change in selling price (Cafferky, 2010). It is therefore necessary to
decide selling price with utmost care.
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5.3 Short-term management decisions based on profit/loss potential and break even
The management decision should be based upon the estimated profit or contribution
per unit and breakeven levels. The table presented below indicates the breakeven point and
budgeted loss/ profit for the business unit.
Table 7: Break-even point and budgeted profit/loss
Particulars Amount/Units
Selling price per unit 10
Variable cost per unit 8
Unit contribution margin 2
Contribution per unit 20.00%
Fixed Costs 30000
Break even sales (in units) 15000
Breakeven point (in value) 150000
No. of units 10000
Sales Revenue 100000
Less Variable cost 80000
Contribution 20000
Less Fixed Costs 30000
Budgeted loss (10000)
As per the table presented above, it is seen that the organization is able to achieve
break-even levels at 15000 units. Moreover, the business unit ends up with budgeted loss at
per decided selling and cost price. The organization should therefore take appropriate
measures to increase profitability. The business unit can increase selling price so as to earn
sufficient amount of profit. The business unit should decide selling price that provides at least
adequate level of profit. Moreover, the organization can reduce cost of operations so as to
achieve sufficient amount of profitability. In short-term the management should strive to
decide price at which sufficient amount of profits can be earned. Moreover, it is through strict
control mechanism that the business unit is able to reduce cost of operations. The
organization should attempt to allocate resources in a manner that it achieves efficiency in
long-run.
It is suggested that the organization should increase selling price and reduce cost of
operations. This in turn helps in increasing profitability for the business unit. Moreover, the
business unit needs to frame effective promotional strategies. This in turn helps in attracting
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large number of customers. It should be ensured that the sales target needs to be met on part
by the organization.
As per the calculations presented in table 6, it can be said that the loss is minimized in
second case whereby selling price has been increased by 10%. The break sales and value is
estimated to be minimum in the case. Moreover, the business unit is incurring no loss in the
situation. Henceforth, organization should increase selling price by 10%. The 2nd scenario is
considered to be feasible option.
It is suggested that the business unit should increase selling price by 10%. It is with
increase in selling price that the organization is not going to incur any loss. It is seen that in
case scenario 2, the business unit is incurring no loss. Henceforth, increase in selling price by
10% is considered to be the most suitable for business unit.
CONCLUSION
The report proposed herewith emphasizes on adoption of various financial techniques
so as to evaluate business performance and decide future course of action. The different
cases are analysed throughout the report. It is seen that the business unit needs to adopt
appropriate financial techniques. The businesses should ensure sufficient profitability and
strive to make optimum utilization of financial and other resources.
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REFERENCES
Books and journals
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learning in the small firm. Journal of Small Business and Enterprise Development.
91. pp.7 – 16.
Friedlob, T.G. and Schleifer F.L.L.,2003. Essentials of Financial Analysis.John Wiley &
Sons.
Grahl, J., 2009. Global Finance and Social Europe.Edward Elgar Publishing.
Helfrit, E., 2001. Financial analysis tools and techniques.McGraw Hill Professional.
Hildreth, W. B., 2004. Financial Management Theory In The Public Sector. Greenwood
Publishing Group
Hirsch, L.M., 2000.Advanced Management Accounting.Cengage Learning EMEA.
Nikbakht, E., 2006. Finance.Barron's Educational Series.
Theeke, H. and Mitchell, B. J., 2008 Financial implications of accounting for human
resources using a liability model. Journal of Human Resource Costing &
Accounting. 122. pp.124 – 137.
Wiedemann, L., 2009. Introduction in Financial Management.Lulu.com.
Online
Objectives Of Financial Statement Analysis. 2015. [Online]. Available through:
<http://accountlearning.blogspot.in/2010/02/objectives-of-financial-
statement.html>. [Accessed on 8th August 2015].
The Importance of a Budget. 2015. [Online]. Available through:
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first-budget.page>. [Accessed on 8th August 2015].
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