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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.

 

“Discussion Question”

 

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:
                                                                                                           Rs.

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.


Requirement

 

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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Replies to This Discussion

Firstly juicer is not run by generator all times. Genset shall only be used while other source of electrical supply is not available. 

As far as cost of electricity is concern, a fixed amount is provided. Even if it was a variable monthly cost, effect would have been the same to cover all monthly expenses. In the case above electricity cost shall be considered a fixed cost and obviously it's my opinion not a fact. :) 

I am agree with you same is my openion

What's your opinion about those 10,000 rupees I've been talking about earlier in account of capital investment? Should we simply ignore it?

Dear this will be met from the operation of the bussiness, later on future date. while calculating the depreciation of juice/generator which is 1000 per month we consider this ten thousand rupees that is 50000 and 10000 which become 60000. this is my view please correct me if i am wrong

It makes sense. In that case we should not be adding 1,389 in monthly expense either as we're already charging depreciation. Weird thing is what will happen at the end of three years, as he has to return the loan in (3 years) 36 months while the period for the return is 60 months. 

Can we not skip the depreciation entirely and require him to make 1,667 additional for a period of first 6 months instead? Guess, it's not correct either.

Please respond quickly. Real life is not as complicated as VU has made it to be. :(

please share complete solution :'(

plz upload soon.11 hours  has left

yar koi Complete solution upload ker daye................

Pleas up lord the soulation. tim bohat thora rah giya ha

All right........ m doomed i admit it .... Why i am i not surprised this is accounting!!

hell is there no understandable way to avoid this deadly sea??? 

Dears dont worry i will share at 8:00am tonight a comlet and perfect soluton.

shumaila y not befor pls send me on it abbas_qaisrani@yahoo.com  i have litle bit confusion

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