Finance for Managers: Break-Even Analysis and Decision Making

This presentation provides a comprehensive overview of break-even analysis, a crucial concept in finance for managers. It begins with an introduction to the break-even concept, its calculation, and a discussion of its strengths and weaknesses. The presentation delves into organizational cost analysis, differentiating between fixed and variable costs, direct and indirect costs, and other relevant cost categories. It explores marginal and absorption costing methods and their impact on business decisions. A case study of XYZ Limited is used to demonstrate the application of break-even calculations, including the graphical method for determining the break-even point. The presentation also analyzes the impact of changes in costs and revenue on the break-even output, emphasizing the importance of these factors in financial planning and decision-making. References are included for further study.

FINANCE FOR MANAGERS

Introduction
The presentation will focus primarily on break-even concept, its calculation, strengths
and weaknesses of using break-even analysis and impact of changes in Cost and
revenue on break-even output. In accordance with the case study, break-even
calculation will be done, and charts will be presented accordingly. Furthermore, an
analysis will be done on organisational Cost and their impact on decisions. Decision
making information will be presented with break-even charts in this presentation.

3.1. Organisational Cost Analysis
Depending on the performance within each expense, the definition of
organizational costs differs. Organizational costs can, in the wider
definition, be defined as either set-up costs or as operational costs.
Organizational set-up expenses are those expenses associated with the
set-up of a company, including such legal assistance, financial
accounting, property taxes, etc. These are early additional expenses to
build a company. The organizational operating costs span a wide
variety of distinct costs related to their procedure, including such
fixed costs, variable costs, indirect costs, and so on.

Cont’d
● Some categories of costs are mentioned here:
- Fixed Cost
- Variable Cost
- Direct Cost
- Indirect Cost
- Total Cost
- Unit Cost
- Marginal
- Opportunity Cost
- Operating Costs
- Overheads

Marginal and absorption costing
Apart from the above mentioned costs, there are some other costs also which occurs
in an accounting period such as:
Marginal pricing is a costing strategy in which units of cost are paid with the
marginal expense, i.e. variable cost, whereas the fixed expenses for the duration is
entirely written off against expenditure (Mazzola,1999).
Absorption costing, also referred to as complete absorption costing, is a form of
administrative accounting to collect all costs involved with the manufacture of a
single commodity. This approach provides for direct and indirect expenses, such as
direct supplies, direct labor, leasing, and compensation.

Impact on Decisions
● Fixed costs and contingent costs, in general, have a significant effect on the
decisions of companies. In comparison, conventional accounting procedures use
estimates to facilitate appropriate corporate practices with respect to minimizing
fixed costs.
● The effect of fixed costs falls on the loss of operational flexibility as knowledge
becomes usable. It helps to make strategic decisions based on economic
knowledge, while also influencing the reduction of operational flexibility due to
excess production and commodity stock pilling. (Ardila et al. 2019).

3.2. Application of Break-Even Calculation to
Case Study
Case study: The case is based on a company named as XYZ limited and produce
different kinds of cloths for kinds, woman and man. They are new in business and
want to know about number of units on which they cannot suffer any form of loss. In
such aspect BEP will be helpful that has bee applied below:
Total revenue – total variable costs – total fixed costs = Profit
(USP x Q) – (UVC x Q) – FC= P
Herein,
USP: Unit selling price, Q: quantity, UVC: Unit variable cost, FC: Fixed cost and P:
Profit.

Continue..
Data
(USP x Q) – (UVC x Q) – FC= P
(60*Q)-(45*Q)-150000= 0
15Q= 150000
Q= 10000

Cont’d
The total expenditures and total income lines are displayed on a chart using the graphical
method; $ is displayed on the y axis and units are seen on the x axis. The point that the
overall expense and benefit lines converge is the point of break-even. The gap between
the overall expense and total sales lines reflects the sum of benefit or loss at various
production amounts. A standard break-even map for Company XYZ limited is seen in
Figure 1. The difference between the production expenses and the line of overall costs
reflects operating expenses.

3M1. Strength and Weakness of Break-even Analysis
Strength Weakness
● It is useful to measure profit and loss at different levels of
production and sales.
● Break-even point has its limitation as well in assuming
sales price to be constant at all levels of output.
● Relationship between fixed Cost and variable costs is
analysed.
● Fixed costs are likely to change after a certain point in time.
Hence break-even calculation gets dismantled.
● It is used in building up of hypothetical situations changing
price and Cost of products in an organisation.
● Preparation of break-even break charts is time-consuming.
● Break-even analysis helps in predicting Cost and efficiency
in terms of profitability.
● Break-even charts point out performance-based within
normal activity ranges.
● Break-even output helps in recognising relevance of fixed
Cost and variable Cost.
● Break-even is only applied to a single product or mix of
single products.

3D1. Impact of changes in Costs and Revenue on
Break-Even Output
The change in cost and revenues put a significant impact on BEP, this is so because
consists formula in which both fixed and variable expenses are included. Along with sales
margin is also mentioned (Brealy, Myers, & Allen, 2011). So this is the reason due to
which BEP can be affected if there is a change in above mentioned items. As in the
previous section BEP has been calculated at different cost and revenues which shows that
at each level there is variation. In the past section, number of units are calculated at the
level of different amount of fixed cost, variable cost. If we make change in all aspects than
there will be a different number of unit on which they will not face any loss or profit.

Reference List
 Ardila, I., Zurriah, R. and Suryani, Y., 2019. Preparation of financial statements
based on financial accounting standards for micro, small and medium
entities. International Journal of Accounting & Finance in Asia Pasific
(IJAFAP), 2(3), pp.1-6.
 Brealy, R, Myers, S, & Allen, F. (2011) Principles of Corporate Finance. US:
McGraw Hill.
 Mazzola, L. (1999) Introduction to Financial Accounting. US: Prentice Hall.