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Break even analysis

CASE STUDY

Break even analysis which is cost –volume-profit analysis is used to plan and assist in decision making by clarifying the effect of changes in volume and business profitability. In calculating breakeven fixed cost and contribution by unity is calculated;

Break-even-point = fixed cost

Contribution per unit

Contribution per unit= sales price – variable costs.

In this case we shall beginning by calculating the variable cost per unit which is $ 0.5 and the selling price per unit is $ 2. Before we calculate the number of juices per a day an important assumption must be made. This assumption is “the cost of the new machine will be absorbed in one year’s time that is depreciation will be for one year.

Contribution per unit= $ 2 –  $ 0.5.

Therefore break-even-point is = 50,000   = 33,333 per year

         1.5

Number days in year 5/7 x365 = 261

Therefore the juices per day are 128 juices per day.

If the cost increase by 0.5 the answer will change and

The break-even-point will be     50,000   = 50,000 per year

       1x 261

Therefore the juices per day are 192 juices per day.

3. There are many factors to be considered before making the decision to purchase the equipment these factors include the availability of capital either internal or external. The capital is affected by capital rationing or complete available due to usage of resources available and having big capital structure. The second factor to considered is whether he has employees with technical know how on how to use the machine. Lastly the hygienic nature of the machine will also take into consideration.

Differential analysis.

In calculating the total cost per unit all costs will be considered. The total cost will be as follows;

Variable cost

Email lencese (7 x 2300)                                                                                        16100

Virus protection license (1 x 2300)                                                                          2300

Other variable costs (4 x 2300)                                                                                9200

Fixed cost

Computer hardware costs                                                                                        94300

Monthly salary           (2 x 8050)                                                                              16100

Total cost                                                                                                                 138,000

Therefore cost per mail is 138 000 = 60

      2300

Use of out sourcing service at a cost of 9 per mail box

Variable cost

Out sourcing (9 x 2300)                                                                                          20700

Virus protection license (1 x 2300)                                                                          2300

Fixed cost

Computer hardware costs                                                                                        94300

Monthly salary           (1 x 8050)                                                                              8050

Total cost                                                                                                               125,350

Cost per mail = 125350 = 54.5

2300

He should except the offer as the cost will be lower than 60 i.e. 54.5

At an additional cost of 5 per mail box the cost will be as follows

Variable cost

Outsourcing (14 x 2300)                                                                                          32200

Fixed cost

Computer hardware costs                                                                                        94300

Total cost                                                                                                               126500

The total cost per unit will be 26500

         2300

The cost per unit will be 55.

He should accept the offer if the out sourcer is not giving alternative two. However if alternative two is available he should go for alternative 1 and reject this alternative.

Conclusion

In this case the best alternative is outsourcing at a cost of 9 per mail box per month as it is cheap.

References

Ask, U, Ax, C. and Johnson’s (1996); cost management in Sweden: from modern to post modern management accounting

Drury C; (2000); Management and cost Accounting;5th edition ,business press  Thomson Learning,

Wald J (2000) Biggs’s Cost accounting; The English Language Book Society and MacDonald and Evans Ltd London & Plymouth

Read about Break-even Analysis at Coca-cola Company

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