Break Even Analysis, Budgeting, and Investment Decisions

This assignment solution addresses key financial concepts, including break-even analysis, cash flow budgeting, and investment decision-making. The first section presents a monthly cash budget for three months, demonstrating the impact of equipment purchase versus leasing. The second part focuses on break-even point calculations for different product lines and analyzes the impact of a new sales mix on profitability, recommending the initiative based on profit increase. The final section explores investment appraisal methods, discussing the information a company owner may require, the reliability of given data, and recommending the use of the Internal Rate of Return (IRR) over the Accounting Rate of Return (ARR) for investment decisions. References to relevant financial texts are also included.

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Break Even Analysis
Name:
Course
Professor’s name
University name
City, State
Date of submission

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Question 1 a
Accounting
Monthly cash budget
for the three months ending 30th September 2018
July August September
Beginning cash
balance
26500 (74000) 61800
Receipts
Fees 140000 160000 200000
Proceeds from sale of
non current assets
100000
Total 166500 186000 261800
Payments
Salaries and wages 70000 70000 70000
Supplies 8500 9200 12000
New equipment 120000 45000 -
Purchase of plant 42000 - 61000

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Total Payments 240500 124200 143000
Cash
Surplus(deficit)
(74000) 61800 118800
b)impact to the cash budget if the company instead hired equipment for $10,000 p.m
instead of buying the new equipment
July August September
Beginning cash
balance
26500 36500 117300
Receipts
Fees 140000 160000 200000
Proceeds from sale of
non current assets
100000
Total 166500 206500 317300
Payments
Salaries and wages 70000 70000 70000

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Supplies 8500 9200 12000
New equipment 10000 10000 10,000
Purchase of plant 42000 - 61000
Total Payments 130000 89200 153000
Cash
Surplus(deficit)
36500 117300 164300
Based on the information above, the company should consider leasing the equipment instead of
buying because unlike the first instance of buying the company’s cash flow is not affected by
leasing the company does not get any cash flow problems under the leasing option.
Question 2
Break even point
Break even point of zero profit or loss. At break even revenues where revenues are equal to costs
(Cafferky, 2014).
Break even sales units = x=FC/(P-V)
Where p=price per unit

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V= variable cost per unit
X= number of units
FC= total fixed costs break even point units
1 year old
402,800/($20-$12)=50,350 units
2 year old
$402,800/($28-$18)=40280units
3 year old
$402,800/($45-$27)=22,378 units
b) before tax profit or loss
total sales(unit sold for each product*selling price
1 year old=125000 units *$20=$2,500,000
2nd year old=75000 units*$28=$2,100,000
3 years old=50000 units*$45=$2,250,000
Total sales=$6850000
Variable cost
1 year old=125000 units *$12=$1500000

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2nd year old=75000 units*$18=$1350000
3 years old=50000 units*$27=$1350000
Total Variable cost=$4,200,000
Total fixed cost=$402,800
Total cost=$4,602,800
Profit = total sales-total cost=($6,850,000-$4,602,800)=$2,247,200
c)new sales mix: 1 year old40%*250,000=100,000 units
2year old 30%*250000=75000 units
3 year old 30%*250000=75000 units
New total sales =(unit sold for each product*selling price
1 year old=100,000 units *$20=$2,000,000
2nd year old=75000 units*$28=$2,100,000
3 years old=75000 units*$45=$3,375,000
Total sales=$7,475,000
Variable cost

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1 year old=100000 units *$12=$1,200,000
2nd year old=75000 units*$18=$1350000
3 years old=75000 units*$27=$2,025,000
New Total Variable cost=$4,575,000
New Total fixed cost=$452,800
Total cost=$5,027,800
New profit= $7,475,000-$5,027,800=$2,447,200
I would recommend the initiative because it increases the profit by $200,000
Question 3
a) The company owner may require information such as the projected cash flows of the two
machines and the discounting rate to enable him make a decision (Kieso, Weygandt and Warfield,
n.d.).
b) I would not rely on the information given if I were the business owner because it lacks clear
illustration of how the numbers were arrived at. We also do not know the discounting rates used
to give this answers. Also, the two methods have results that have a very wide disparity hence
cannot be trusted (Horngren, 2014).

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c) I would advise the owner to use the IRR because IRR is a discounted cash flow method. on
the other hand ARR is a non discounted cash flow method which disregards the present values of
future cash flows generated by capital investment. Thus IRR reflects changes of cash flows
overtime while ARR assumes cash flows remain unchanged (Vance, 2003).