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Opening Date 13-02-2015 And closing date 17-02-2015

Topic: Breakeven Point

Learning Objectives: The students will learn through this GDB the basic mechanism of break-even analysis in small businesses working in surrounding of their daily life.

Learning Outcomes: After going through this GDB, the learners are expected to apply their knowledge through break-even model to solve cost profit volume issues in their surroundings - especially in small business at sole proprietor level.

Question

Mr. Ali - a poor young man has grown up in the vicious state of poverty. Being an uneducated man, he has no respectable livelihood for himself and his poor family. Recently, he has come to know that the local government has announced to provide small interest-free loans to the people for starting small scale businesses.

He planned to start a photocopy center in a rented shop located near a large college. He applied for a loan with the local government and to his luck; he has been provided a loan worth Rs. 90,000 for a period of two years payable in equal monthly installments.

Using this borrowed money, he chalked out a business plan with following features:

Estimated purchase price of a photocopy machine along with a Generator having a combined useful life of 5 years.

Rs.90,000

Other than purchase of photocopy material, monthly expenses are:

Rent of the shop

Monthly electricity bill

Misc. Expenses

 

Rs. 7,500

Rs. 10,000

Rs. 2,500

 

Ali acquired a used photocopy machine along with generator (with the similar expected useful life) for a total of Rs. 90,000 payable in two equal installments; each to be paid by the end of third month. He can easily get paper from a local whole seller at Rs. 350 per ream for a foreseeable period. Each ream consists of 500 papers. Cost of toner refilling is Rs.500 which will last 5,000 pages. Misc. variable costs including the cost of staple pins are estimated at 10% of the unit sale price which is Rs. 2 per page.

Although things were very clear to Ali, yet he was unable to determine the minimum quantity to sell in order to avoid any financial loss. He was more worried as he has to repay the monthly installments along with feeding his small family.

Requirement: While considering the above information you are required to answer the following:

a)      What types of fixed costs are to be accounted for?

b)      How Misc. variable expenses can be treated for determining cost per page?

c)       Do Misc. variable expenses bear any bearing upon unit sale price?

d)      Determine unit contribution margin.

InstructionsJust provide your final answers, no need to paste the calculations. Marks will be given only on the basis of final given answers. 

Views: 5167

Replies to This Discussion

Asif bhai aap ne misc. exp. ko kaisay fixed cost consider kiya plz clarify!!!

sir isy a) point ma e write kren ga kia??

unit contribution margin

sales per units Rs. 01

less vc per unit Rs.01

unit contribution margin = Rs.01

contribution margin is defined as in equation;

                                                                  contribution margin= sales - variable cost

The contribution margin concept is useful for deciding whether to allow a lower price in special pricing situations. If the contribution margin at a particular price point is excessively low or negative, it would be unwise to continue selling a product at that price. It is also useful for determining the profits that will arise from various sales level

daer shakeel bhai please help us;

Plz guide which lecture should be study to solve this gdb???

is ka koi be specific lecture ni

Fixed costs are those costs that do not change based on production levels, while variable costs increase or decrease based on production.

Fixed costs can be assets like buildings and equipment. For example, a beverage company that bottles water is going to need a physical building and an assembly line that includes specialized equipment. If we assume the building and equipment are leased, there is a monthly payment for each of them. The company is responsible for paying 100% of the monthly payments whether they produce one 1 unit or more

It is important to note that fixed costs are NOT always the same. Like the price of anything, they can change - sometimes unpredictably and sometimes on a regular schedule, but they do so based on some other factor, NOT the level of production. For example, if a lease contract is being renegotiated and a Rs10,000 per month lease payment is increased to Rs10,500 per month, fixed costs have risen, but not because of production levels.

I read it critically, according to above statement all monthly expense treated as fixed in question

examples of fixed costs:

  • Amortization. This is the gradual charging to expense of the cost of an intangible asset(such as a purchased patent) over the useful life of the asset.
  • Depreciation. This is the gradual charging to expense of the cost of a tangible asset (such as production equipment) over the useful life of the asset.
  • Insurance. This is a periodic charge under an insurance contract.
  • Interest expense. This is the cost of funds loaned to a business by a lender. This is only a fixed cost if a fixed interest rate was incorporated into the loan agreement.
  • Property taxes. This is a tax charged to a business by the local government, which is based on the cost of its assets.
  • Rent. This is a periodic charge for the use of real estate owned by a landlord.
  • Salaries. This is a fixed compensation amount paid to employees, irrespective of their hours worked.
  • Utilities. This is the cost of electricity, gas, phones, and so forth. This cost has a variable element, but is largely fixed.

examples of variable costs, all in a production setting:

  • Direct materials. The most purely variable cost of all, these are the raw materials that go into a product.
  • Piece rate labor. This is the amount paid to workers for every unit completed (note: direct labor is frequently not a variable cost, since a minimum number of people are needed to staff the production area; this makes it a fixed cost).
  • Production supplies. Things like machinery oil are consumed based on the amount of machinery usage, so these costs vary with production volume.
  • Billable staff wages. If a company bills out the time of its employees, and those employees are only paid if they work billable hours, then this is a variable cost. However, if they are paid salaries (where they are paid no matter how many hours they work), then this is a fixed cost.
  • Commissions. Salespeople are paid a commission only if they sell products or services, so this is clearly a variable cost.
  • Credit card fees. Fees are only charged to a business if it accepts credit card purchases from customers. Only the credit card fees that are a percentage of sales (i.e., not the monthly fixed fee) should be considered variable.
  • Freight out. A business incurs a shipping cost only when it sells and ships out a product. Thus, freight out can be considered a variable cost.

Do Misc. variable expenses bear any bearing upon unit sale price?

A change in demand affects your sales and impacts your variable costs. As your sales grow, your variable costs increase. As your sales fall, your variable costs decrease. If you raise or lower your sales price, the new selling price must be enough to cover your variable costs and fixed costs in order to break even. You can control your variable costs by changing vendors to get a lower price or cutting employee work hours to reduce payroll. This can increase your profits when sales are strong or help you break even or lessen a loss in times of decreasing sales.

 The variable portion of your factory overhead, such as utilities and replacement parts and supplies, vary with sales volume. In contrast, step-variable costs only change if sales increase or decrease significantly. 

sir fixed cost kon si hain plzzzzzzz he

yar asif bhai DO misc. variable exp. walay question ka meaning kaya hai, I mean is question main poucha kaya gaya hai???

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