SMALL BUSINESS MANAGEMENT
In this course, I think we have only Break Even Point and cash budget as calculation which students fear most. The Cash budget will be posted tomorrow.
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 8th 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
CALCULATION –
SOLUTION TO QUESTION (1)
Fixed Cost (FC) N250,000
Selling Price (SP) N150
Variable Cost N50
B.E.P In Unit
Contribution = (SP – VC) 150-50 = 100. Selling Price minus Variable Cost will give
you 100
FC________
Contribution/Unit =
250,000/100 = 2,500 units. Explanation (Fixed Cost which is 250,000 divide by Contribution per
unit which is 100 gives you 100.
Now B.E.P in Naria
FC________
Contribution/Unit
x Selling Price (SP) = 2,500 x 150 = 375,000
Explanation;
Since we have solved for FC/Contribution which gives us 2,500, we don’t need to
solve for it again so we just multiply it by Selling Price which is 2,500 x 150
= N375,000.00
NOW TO CALCULATE PROFIT
Profit =
Total Contribution minus Fixed Cost
Which is
100 x 3000 = N300,000
Less Fixed
Cost = (N250,000)
Profit = N50,000
With this
you can solve question no 3 yourself.
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