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Financial Control

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Introduction

Unit 3 - Investigating Financial Control Assignment a) What is break even? Break even occurs when income is equal to expenditure. It is the point of sales where the company sells enough products to cover all of the variable and fixed costs associated with producing a product. The next unit sold will start to generate profit for the company. In order to calculate the break-even point, it is necessary to know the following: * Fixed costs - These costs have to be paid, no matter how much is being produced e.g. rent, rates, heating and most staff wages. * Variable costs per unit - These costs are directly affected by the amount produced or sold e.g. raw materials, stock for resale, staff commission on sales and overtime payments. * Selling price per unit - The amount of money charged to the customer for each unit of a product or service. * Expected unit sales - The number of units of the product projected to be sold over a specific period of time. ...read more.

Middle

Example of fixed costs: * Rent * Wages * Heating * Electricity * Insurance * Advertising How break even can be calculated: The break even point can be calculated by means of a formula and also by the construction of a break even chart. Sales for break even = fixed costs / selling price per unit - variable cost per unit Example of break even: The variable cost for making one burger is �0.97 The fixed costs of making burgers for 18 months will be a total of: �140.000 The expected unit sales of 150,000 burgers for 18 months The unit price of the product is �1.99 With expected unit sales of 150000, �13,000 profit is made. b) E.g. 1 - Numerical example of break even Lawnmower business The figures used for both selling price and variable cost are both per unit. Lawnmowers are brought for �50 (Variable cost) and are to be sold at �80 each. The fixed costs for the business are 2,000. ...read more.

Conclusion

Margin of Safety: This is sometimes called the safety margin. This can be measured when the level of sales is above the break even point, basically when the business is profitable. The margin of safety is the number by which sales would have to fall before the break even point is reached. Going back to my example of the lawnmower business I have mentioned, if the sales were 85 then the margin of safety would be: 85 - 67 = 18 If Mr Hatzis was to sell 1000 kebabs, his margin of safety would be: 1000-500 = 500 units d) I am carrying out the same calculation of break even, but using the formula method instead of the chart to show Mr Hatzis how this is done: Sales for break even = �400 / 0.80 = 500units e) I am going to use actual sales figures from Mr Hatzis's first month of trading, with sales of 700 kebabs. i) Reduced the selling price to �1.50 per kebab. Total revenue = �1050 Total cost = �960 Profit = �90 ii) Cut overheads down to �200 Total revenue = �1120 Total cost = �760 Profit = �360 ?? ?? ?? ?? 1 ...read more.

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