Contribution= sale price – variable cost
I get the data to calculate break-even of McDonald, which show as below:
Average selling price of product: £1.50
Average variable cost of a product: £0.4
Fixed costs in an average outlet per annum: £1 000 000
Now I calculate the break even point by the equation:
Contribution: £1.50- £0.40= £1.1
Break-even: £1 000 000/ £1.1= 909091
That show McDonald need to sell 909091 products in a year to make the break-even. And it can also show as chart:
There is the break even chart next page:
AIM AND OBJECTIVE OF MCDONALD
McDonald's aim to be the UK's best fast service restaurant experience.
- To be the best, McDonald need to maintain the quality of food, so McDonald is aim to create a long term relationship with limit numbers supplier partners. The supplier need to ensure they can meet McDonald required standards. And their standards are based on quality, value and cleanliness.
- Also McDonald want to expand and growth in UK. It grows rapidly in UK in these 25 years, the graph below show us:
- To be the best fast food service, they need to be better than the main competitor. Such as, Burger King, but in the USA, competitors also include Wendy's, Taco Bell and Subway.
THE STRUCTURE OF MCDONALD is oversees on five major areas:
- Operations (equipment and franchising)
- Development (property and construction)
- Finance (supply chain and new product development)
- Marketing (sales marketing)
- Human Resources (customer services, personnel, hygiene and safety)
HOW CAN BREAK-EVEN ENABLE MCDONALD TO MEET AIM & OBJECTIVE
Every business aims to make a profit to expand and don’t want to make a loss. Because the entire objective such as expand the company, improves the quality etc are need money to achieve. First step to make a profit is covering the cost of business to survive. That needs to meet the break-even point. Because the company can’t get the money back to cover the cost in the short term, it will be fail. Most of the reason of a company fail are they pay all the money in the business, but can’t make profit in short term to cover the cost. So we need to have break even analysis that is a financial plan for a company. After calculate break-even, we may know how many product we need to sell to cover the overall cost of a company.
On above, I calculate we need to sell at leases 909091 product to cost the cost. Sell less than that, we will make a loss. If sell more, we will make a profit. Lower 909091, which is a loss-making zone. And more 909091 is the profit-making zone of McDonald. So, McDonald want to growth in UK, it needs to make a profit, and use the money to expand the company. And the break-even analysis shows a plan of how many product we need to sell. Have a finance plan that will be help to make the profit, which is help us to achieve the objective. Below is the five year analysis of the number of McDonald's UK retail outlets and their pre-tax profits:
This show in five years the finance plans if McDonald is achieving good result.
HOW TO MAKE THE MAXIMUM PROFIT
If we want to raise the profit to the highest possible level, we can achieve in two ways: lower the cost and raising the avenue. If we increase the selling price, we can sell fewer products to meet the break-even point. If we lower the cost, we can sell fewer products to cover the cost.
Raising the revenue- we can do it in those ways below:
- Improving the quality of the product, e.g. make the food more fresh and clear than the competitors
- Successful promotion and advertising
- Open a new market, e.g. find which town in UK hasn’t had a McDonald yet.
- Producing a new product
- Increase the selling price of the product (most direct way to raise revenue).
Below will show if we raise the selling price to £2.50, when we will meet the break-even:
That will show as the black line in graph1.
We can also calculate in the equation:
Contribution: £2.50- £0.40= £2.1
Break-even: £1 000 000/ £2.1= 476190
That show after increase the selling price, we meet the break-even earlier. But there are also got some disadvantage of increase the selling price. If increase the price too high, customer won’t come back because too expensive. So we need to be careful don’t add the price too high.
Lower the cost- a firm like McDonald can lower the cost by those ways:
- Buying the raw materials from cheaper sources
- Pay less salary to the staff
- Product more efficiently, minimum the waste
- Increase output to benefit from economic of scale
A big company like McDonald can increase the output to benefit from economic scale, because they can
- arrange a big discount from the supplier of food,
- able to raise finance far cheaper then small company,
- Mass production techniques using specialist machinery, such as the produce of the toy in “happy meal” can use a big scale machine and more efficient. Also the cost of research and invest for a new type of food can divide to big amount of products. That make the cost of food won’t be too expensive.
But there also got the disadvantage of cutting the cost. For example: cut the cost on buy cheaper raw material may cause to decrease the quality of food. But in the objective of McDonald shown the good way of lower the cost of raw material also won’t decrease the quality, that is make a relationship with limit suppliers.
The other example of disadvantage of lower the cost is pay less to the staff. This can reduce the fixed cost directly, but it may let to lose of the staff. Because the wages of McDonald’s staff nearly touch the lower wages in UK. So I think if need to lower the cost, it should be work on increase the output to benefit from economic scale.
