SMALL BUSINESS MANAGEMENT - BREAK EVEN ANALYSIS

SMALL BUSINESS MANAGEMENT

Topic:    BREAK-EVEN ANALYSIS

QUESTION 1:

How can a small business go about computing its Break-Even Point? In your answer, be sure to include a discussion of fixed cost, variable cost and selling price.

Question 2:

The Current final Year Students (Biz Admin), Proposed small business with the following parameters:

Fixed Cost (FC)                 N250,000

Selling Price (SP)             N150

Variable Cost                     N50

Required:

A.      What is the Break-Even-Point of the business

B.      Calculate the Profit, if the business Produce and sold 3,000 units at the same time

C.      Will it be desirable to operate a business at the sales volume below the Break-Even Point? Explain

Question 3:

On the 8^th June, 2010, the 500L CDL Student proposed a small business venture (Bread Making) with the following Parameter:

Fixed Cost (FC)                 N200,000

Selling Price (SP)             N100

Variable Cost                     N20

Required:

A.      Determine the B.E.P of the business

B.      Find the Profit of the business if 3,000 loafs of bread is produced and sold at the same price

Solution to Question 1:

Break-Even-Analysis – This is the technique used by an organization to determine the level of production that would make the business to realize the cost of production even if it is not making profit.

The B.E.A is used to interpret the relation between cost, revenue and sales volume etc.

Assumption of B.E.A

1.       Fixed cost will remain unchanged for a very long time

2.       Variable cost per unit will remain constant

3.       Sales volume will remain constant

4.       Total Cost will be separated into fixed & variable cost

Computation of Break – Even Point

(1)    Determine the contribution per unit (SP-VC) = Contribution

(2)    (B.E.P in Unit) =            FC            

                                Contribution      x  SP

(3)    B.E.P in Naira

(4)    Profit = Total Contribution – Fixed Cost (FC)

                 OR

Contribution/unit X Total Quantity                           xx

Less Fixed Cost (FC)                                            (xx)

Profit                                                                      xx

FIXED COST

These are costs organization incurred at least once in a production process.  E.g. rent, acquisition of land and building, salaries etc.

VARIABLE COST

These are cost that changes according to the level of production e.g. cost of raw materials.

SELLING PRICE

This is the price at which a unit of product can be sold.  The selling price is determined after the cost of production has been calculated.  That is the total cost of production divide by the total unit produced.

CONTRIBUTION PER UNIT

This is the different between the selling price per unit and the variable price per unit (SP-VC) = contribution