It is important to classify costs because it helps with spending, it helps with budgets and help in producing break-even charts.
Break-even has many assumptions and limitations: -
There is an assumption that all data behaves in a linear manner.
The unit costs may fall as output increases. Some costs may be stepped in nature.
In the practice there are many influences on costs and revenues- changes in technology, changes in level of productivity.
The break-even chart assumes that the only factor affecting costs and revenues is sales volume.
There is an assumption that all production is sold. The break-even chart does not take into account changing stock levels.
Break-even charts generally only relate to a single product.
The profit made at 4000 levels of output is £2000. Total costs are £14000 and total revenue is £16000.
Margin of safety is the amount by which demand can fall before a firm incurs losses, i.e. how close the firm is to the break-even level of output.
Break-even- 3000 output which is 12 000.
Objective- to make a profit of £10 000.
8000 units = 22 000 total cost.
8000 units = 32 000 total revenue.
Profit = £10 000
Since Bradbury Plc already sells their chocolates at £5 per piece, this is the price that has been put forward by the supermarket Besco’s. There are other things that will affect the their decision to produce the supermarkets own brand of Buzz chocolate.
Though the main factor will be that the company will have regular orders for the chocolate, leaving them reasonably confident that they have a reasonable source of revenue. There are other factors such as:
- Increase in competition. As a new brand of chocolate is released against them, with similar features to that of their new chocolate Buzz, it will reduce the mount of revenue
Calculating both the unit and sales value to achieve the best profit
Unit- £4 –£1=£3
The profit the business makes if it sell 5000 bars
(Profit schedule) TR-TC
Average rate of return- average annual return*100/initial outlay.
Net cash flow- the investment outlay.
480 000/4= 120 000 average annual profit.
Net present value
Initial cost – 600000
Badbury is considering to invest 600000 in to the chocolate mixing machine.
End of year 1 100
End of year 2 400
End of year 3 400
End of year 4 180
So the pay back period is between 2 and 3 years. (2 years and 3 months)
Budget is a forward financial plan usually involving a cash flow forecast, forecast sales and forecast costs. The budget is a kind of route map that should have been set in the light of the company's objectives for the period. Divergences from a budget figure can be analysed by variance analysis. Budgets can be used as a discipline, a coordinator, a motivator, a monitoring and control device and a trigger for remedial action, as well as a test of forecasting ability. Badbury should prepare budgets because budgets have many different advantages and uses.
There are many types of budgets: -
Nut and choc- £3000*2/6*1/5000=0.2
Nut and choc- £2000*5/12*1*5000=0.6
Job card for the cake
Cherries- 120/100=1.2 1.2*300g=£3.60
Sultanas- 0.65/250=0.26 2.6*1050g=£2.73
Currants- 0.55/250=0.22 2.2*675g=£1.48
Margarine- 0.95/250=0.38 3.8*750g=£2.85
Sugar- 1.50/1000=0.15 0.15*750g=£1.12
Eggs- 1.20/6=0.2 0.2*15g=£3.00
Almonds- 1.50/1.50=1 1*225g=£2.25
Flour- 1.00/1000=0.001 0.001*750=£0.75
Marzipan- 1.75/500=0.35 0.35*1500=£5.25
Icing- 1.55/500=0.31 0.31*1500=£4.65
Preparation time- 5 hours *£5.50=£27.50
Cooking time- 6 hours*£1.50=£9.00
Calculating the cost per unit for the batch of meals for the employees
Total cost = 1729
Profit @ 25%=432.25
1729 + 432.25 = 2161.25
25% of £21.61= £5.40
£5.40 + £21.61 = £27.01
Here's what a star student thought of this essay
Quality of writing
The report states three main terms, these are 'Fixed Cost', 'Variable Cost' and 'Semi-Variable Cost'. These three terms are explained well within the report which should allow the exmainer to understand with ease. The student has in-putted a number of charts/graphs which help support the student's writing. This should allow the examiner to understand with ease with the use of these graphs/chars.
Level of analysis
The student has listed a number of assumptions and limitations with break even analysis. However the student hasn't justified why there might be some limitations within this method. The report could include 'With any accounting policy, there may be some limitations, as there are too many factors which could change. It' important to notice any factors which may effect the outcome of break even analysis'.
Response to question
In summary, the report is quite good in the sections which are complete. The report states three different types of cost, and has given examples of the Net Present Value and Payback Period. However some parts are missing, and this should be completed. The student understands three main terms, which is essential to understand break even analysis which is further below the report. The student has given an example, and worked out the 'Net Present Value' and worked out their 'Payback Period', which is necessary when a buisness evaluates an investment idea/concept. Task 6, 7, 8 & 9 are missing. This should be added to the report, before submitting to the examiner. In addition, Task 11 is quite unclear. The student should write a little and explain what this shows.