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Topic: Breakeven Point
The students will learn through this GDB the basic mechanism of break-even analysis in small businesses working in surrounding of their daily life.
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.
Mr. Santa - a poor young man has grown up in the vicious state of poverty. These days, he has a small family containing his 2 kids and a wife. 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 a plan to provide small interest-free loans to the people of his community.
Last week, he consulted this announcement with one of his close friend - Mr. Banta, who is running a small barber shop near his own house. Banta gave him an advice to apply for the loan to start a small juice corner in a rented shop located near a large populated community boy’s school. Santa seriously started thinking over the advice and with the help of his neighbor – Mr. Educated; he applied for a loan with the local government. To his luck, he has been provided a loan worth Rs. 50,000 for a period of three years payable in equal monthly installments.
Using this borrowed money, his friends - Banta and Educated chalked out a business plan for Santa bearing the following features:
Estimated purchase price of a Sugarcane Juice Extractor 80,000
along with a Generator having 5 years useful life
Other Monthly expenses:
Rent of the shop 5,000
Monthly electricity bill 1,500
Advertising expenses 1,000
Wages to helper 3,000
Administration expenses 500
Banta again helped Santa and approached one of his fast friends – Mr. Mechanic and got the same but used machinery (with the similar expected useful life) for a total of Rs. 60,000 payable in two equal installments; each to be paid by the end of third month.
These people estimated that Santa can easily get sugarcane sticks from a local fruit whole seller – Mr. Aarhtee at Rs. 5 per stick for a foreseeable period. Each stick of sugarcane will produce 500 ml of sugarcane juice. Additional costs of using ice, lemon and salt has been estimated at Rs. 1 per each 250 ml juice produced.
It was decided that to attract the market, Santa will sell the sugarcane juice in three packing’s – small glass of 250 ml, large glass of 500 ml, and a family jug of 1,000 ml. Santa was agreed to sell the juice at a sale price of Rs. 5 per each 250ml.
Although things were very clear to Santa, 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.
By considering the above information you are required to answer the following:
1. How many sticks of sugarcane should be used by Mr. Santa during any month to covers its all fixed expenses?
2. How many “family jugs” should be sold out by Mr. Santa to cover up the monthly fixed cost?
3. What should be the total sales amount through which Mr. Santa can earn the profit of Rs. 12,000 for a given month?
4. Once a representative of an insurance company – Mr. Agent visited his shop and offered him to purchase an insurance policy from his company for avoiding any uncertainty at monthly premium of Rs. 3,000. By doing so Santa’s monthly cost has been increased. You are required to mention the number of large glasses that should be sold out by Mr. Santa to cover all of his expenses including the insurance cost.
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I have also solved but i am confused about the right answer.
I am confused about electricity bill of 1500 as in many cases it varies but in this cases juice machine is run by generator. Here i am confused that is it a fixed or variable other costs are fixed.
im calculating taking fixed cost 11,000 as electricity is also fixed.. generator has a useful life of 5 yrz and generators do not use electricity to run, it is on petrol and there is no mention of petrol expenses.
Loan for 3 years in equal monthly installment = 1,389
Depreciation = 1,000
Fixed monthly expenses = 5,000+1,500+1,000+3,000+500+1,389+1,000 = 13,389
Income per stick of sugarcane = 3
Number of sugarcane sticks needed in order to earn 13,389 = 13,389/3 = 4,463
Please share actual solution if someone has it or at least explain the above working if correct or not.
where does the 1389 came from. the cost of generator and juicer is 60000 for useful life of 5 yeas then how much will be per month depreciation.
It's the bank loan he got of 50,000 for a period of three years in equal monthly installments = 50,000/36 =1389
But there still is a need of additional 10,000 to pay for juicer and genset in account of capital investment. Wonder how to adjust that. Any idea?
The purchase price of the generator is 60000 my dear so 60000/5=12000 and per month depreciation is 12000/12=1000
Fine with depreciation. Can you please give your opinion about 10,000 as the loan he got is 50,000 while the equipment he purchased costed 60,000/- how will he recover these 10,000 rupees. Does that mean he needs to make 1,667/- additional per month for first 6 months to overcome this expense?
please tell me how you calculate 1000 depriciation. y you use electicity bill in fix expenses. electricity bill is not fixed it is very able because it varry on using the bill of electicity
1000 depreciation as the equipment worth 60,000 has a useful life of 5 years 60,000/60 = 1000
That is based on assumption that equipment price will be zero upon completion of 5 years.
It's a flaw in question, if they had given a range it would have been a variable cost. They must have fixed the bill with involvement of Wapda guys. Bijli Chor :P
Electricity bill is most cases variable. In this question there is not given total sales or fixed no of sticks so how to adjust/allocate this overhead cost to a specific no of units. The juicer is run by generator.