You are on page 1of 12

# Business Report : Break-even Analysis

## By: Zara Hirani Business Studies: Mr. Woods

Break-even charts are used in performing a break-even analysis to estimate when the total sales revenue will equal total costs. The calculated break-even point is when the area of loss will end and the area of prot will begin (Business Dictionary). In order to create a break-ever graph the following information is required: - Fixed costs : A cost that remains the same irrespective of the level of output or sales revenue. It includes costs such as rent, wages&etc (Business Dictionary). - Variable Costs : A cost that varies with the output and/or the sales revenue of a business (Business Dictionary). - Total Costs : The addition of the xed and variable costs (Business Dictionary). - Revenue : The income generated from the sale of goods before the deduction of costs and expenses(Business Dictionary). Break-even Analysis for The Sherston Banana Company PART A Production Capacity: 100,000 Selling Price: \$1.60 Variable cost per bunch: \$0.60 Total fixed costs: \$60,000
OUTPUT = 0 OUTPUT = 100,000

Fixed Costs Variable Costs Total Costs Revenue PART B Selling Price: \$1.40

60,000 0 60,000 0

## Variable cost per bunch: \$0.10 Total fixed costs: \$3,000

OUTPUT = 0 OUTPUT = 100,000

## Fixed Costs Variable Costs Total Costs Revenue

63,000 0 63,000 0

## 63,000 70,000 133,000 140,000

Break-Even Analysis

Fixed Costs
PART A

Variable Costs

Total Costs

Revenue

200000

150000

Area of Prot

100000

Area of Loss

50000

## 50,000 Units of Production

100,000

B.E.P = Fixed Costs / Contribution Contribution = Price - Variable cost per unit = 1.60 - 0.60 = 1.00 B.E.P = \$60,000 / 1.00 = \$60,000

Break-Even Analysis

PART B

Variable Costs

Total Costs

Revenue

225000

## Costs and Revenue (\$)

150000

ao re A

o Pr

75000

ea Ar

o fL

ss

50,000

100,000

150,000

Units of Production B.E.P = Fixed Costs / Contribution Contribution = Price - Variable cost per unit = 1.40 - 0.70 = 0.70 B.E.P = \$63,000 / 0.70 = \$90,000

Break-Even Analysis

Impact of Changes For the Sherston Banana Company, their selling price has decreased to \$1.40, decreased by \$0.20. The fixed costs have been increased by \$3,000. The variable costs have been increased by \$0.10 per unit. The increase in the fixed costs and variable costs has brought an increase on the total costs, as more money is being spent on the production of the bananas. However the increase of fixed and variable costs has no effect on the total revenue, as more money spent on production doesnt ensure more profit. Although, it increases the Break-even point. Furthermore, the decrease in sales price will have no effect on the total costs, however it will decrease the revenue and increase the Breakeven point, which implies that there will be a significant decrease in the profit. It suggests, that these changes will have a negative impact on the companys revenue as it will increase the area of loss and decrease the area of profit. Since the break-even point has increased to \$90,000, they will have to earn at least that much to avoid a loss. Essentially, decreasing their selling price, with increased fixed and variable costs, the company will endure a loss. The main reason why the Sherston Banana Company have decided to lower their price, is due to competition. Their competitors have started charging their customers \$1.40 for the exact same bananas while Sherston Banana Company charges \$1.60. Most customers will look for the cheaper option. Majority customers will buy for the Sherston Banana Companys competitors as they offer a lower price for the exact same bananas. Since the demands for bananas are low, due to high supplies and availability, the company will not profit if they charge a high price for the bananas. Furthermore, the costs of growing bananas in Costa Rica have increased, which has brought an increase in the variable and fixed costs. Due to the use of pesticides on the banana plantations, workers and farmerss health are declining, which is a problem for the business as it can lower production. Therefore, money is being spent of paying for the health care of the farmers. Also, the company also needs to ensure that the environmental conditions are satisfactory, which adds to the expenses, as environmental agencies will act against them. Benefits and Limitations of Break-even charts Benefits Limitations

- Managers are able to calculate expected prot or loss at any level of output

- It does not show the possibility that stocks may build up or that all goods may not be sold.

Break-Even Analysis

Benefits

Limitations

- They can help to see the impacts of business decisions by redrawing the graph - They show the safety margin which is the amount by which sales exceed the break even point, showing area of prot. - They are used to predict the effect on the prot, if the selling price is changed.

- Fixed costs can also change if scale of production is changed. - The graph only focuses on the break-even point, ignoring all other aspects of production. - It only applies to one kind of product. A different graph would have to be made for each different type of product, its output and the cost of making it.

- Managers can predict in advance how much the business will have to earn in order to avoid a loss.

- The graph does not take into account diseconomies of sales, which the business could use.

A businesses response to change (action plan) A real company that has faced a situation where their competitors have lowered their prices, is the online seller Amazon. Amazons major competition with their competitors is always ongoing. During seasonal discounts, Amazon and Walmart always compete to have the lowest price offers for their books and DVDs section. Walmart being a much bigger business than Amazon is usually more successful in keeping their prices very low. In an article from The NewYork Times, it is stated, Wal-Mart dropped the price of the oven to \$17, from \$28, as part of its Black Friday deals. Later the same day, Amazon cut its price, which had also been \$28, to \$18(The NewYork Times). This suggests that Amazon was also competing with Wal-Mart to offer its customers the lowest prices. Price wars are always beneficial for consumers but not always for businesses. The only reason Amazon decided to lower its prices is because Wal-Mart lowered their. Therefore, customers will only buy from where they will get the best deals. The article also states that Wal-Mart dominates in offering the lowest prices to customers(The NewYork Times). This implies that the affect of this price war between Amazon and Wal-Mart doesnt prove to be very successful for Amazon, as their competitors become more successful in earning a larger profit by decreasing the selling price. Another reason why Wal-Mart was more successful in this price war was because its a retailing store with many locations around the United States. The business also offers online shopping, whereas Amazon is only gained recognition for being an online store. Many consumers may not choose to buy discounted goods from an online store. In conclusion, Amazons response to this change was positive, yet negative. They were unsuccessful in always offering the lowest prices, however they did not let their sales or profit fall.
Break-Even Analysis 6

Name: Zara

## Date: 19.9.20 Date/ Timings 15/9/12

Objective: Research Question: Can you nd an example of a real company that has faced a situation where either their competitors have changed price or where costs of the materials they use for production have changed?

Tasks to be complete Google search: real company which faced a price war with its competitors. Analyze results, read articles/documents and take relevant information from them. Google search: increase in production costs for businesses.

## Resources Required Computer, Internet connection, Google search engine

Evaluation/ Follow up Action This search on google was unsuccessful as the results from this search were not helpful or very relevant. This search on google was again not successful. The results that were obtained were irrelevant and not specic to just one company. The results were too vague. This task was successful to a certain extent. I used the famous business website called HuffingtonPost, where I found some articles about price wars, however, I need to nd an article about a specic company. This search was successful as I was able to nd a specic company, Coca Cola, whose competitors changed their prices.

15/9/12

## Computer, Internet connection, Google search engine

16/9/12

Search on business articles website for articles on price wars between companies

16/9/12

## Computer, Internet connection, Google search engine

Break-Even Analysis

Name: Zara

Date: 19.9.20

Objective: Research Question: Can you nd an example of a real company that has faced a situation where either their competitors have changed price or where costs of the materials they use for production have changed?

16/9/12

Search on google, further about the price war between Coca Cola and Pepsi.

## Computer, Internet connection, Google search engine

This search on google was not a success as the results were too vague. The price war between coca cola and pepsi was in different parts of the world, and was not very specic, which made answering the research question difcult. This search to the library was unsuccessful again, as I found some articles about price wars and increased costs in productions, however these articles were not specic to one company. This search on google was very successful as there were lots of articles about Amazon and its price wars with their competitors Walmart.

17/9/12

Go to library and nd a business magazine and search for articles about price wars or increase in costs for production.

Library, magazines

18/9/12

## Computer, Internet connection, Google search engine

Break-Even Analysis

Stakeholder group Aims for the stakeholder group

## Owners Government The whole community

- A share of prots, so that they are able to retain the money invested. - Growth of the business so that the value of investment increases. - Employment of people, payment of taxes and growth to the countrys economy. - Implementation of laws - Jobs for population - Production does not pollute environment - Safe products for consumers

For example, the owners of the business shows an interest in only making profit. However, the government may also emphasize on the business taking care of the surrounding environment. Also the people of the community may feel that workers should have proper working conditions and that factories dont pollute the environment. Conflict occurs when their is disagreements. Owners may believe that they are running the business to provide goods and services for profit and not to protect the environment. The government could believe that they should not have to pay to clean the environment, it should be the owners responsibility. These conflicts impact the environment, as it becomes neglected, due to stakeholders conflict. Specifically, businesses in the banana production industry are facing problems due to the surrounding environment. Due to unsanitary environments and the use of chemicals in growing bananas is increasing costs.

Break-Even Analysis

Analysis of Articles

Limitations of the article This article is biased because it is written by an environmental agency that is working towards the elimination of pesticides. Therefore, the writer does not mention any of the benefits of using pesticides. They did not mention any benefits as they are trying to promote pesticides as damaging. Hence they do not want to encourage people to use pesticides.

Article # 1

Article # 2

Break-Even Analysis

10

Summary of Article / Authors Values The last article is a blog post. It is run by a lady living in Honduras. The topics she writes about are the cultural differences, Honduran politics, corruption &etc. Her blog article talks abut the effects of pesticides on farmers who are women. She has written a blog post speaking from their point of view. The article states the price of bananas, and their damaging effects on the workers and the natural environment.

Limitations of the article This article is written by a blogger. The reader does not know of the bloggers qualifications and hence the facts mentioned may not be true or reliable. Also, this is a personal blog, so the opinions expressed are personal to the writer. The reader may not agree with it and facts may not also support the opinions.

Article # 3

The environmental effects of the banana plantation industry in Costa Rica are quite negative to an extent. However, there are some positive aspects of the banana plantations in Costa Rica, which the articles do not mention. My personal opinion on the environmental effects of the banana plantations in cost rica is that even though they are negative and damaging the environment and the workers, they can be controlled. The use of pesticides on the banana plantations is used for the aid of the businesss productions. However, workers are unaware of the side effects of pesticides, which makes them fall ill and suffer from diseases. Although, these businesses create more job opportunities for the people living in the rural areas of Costa Rica. If the banana plantations are shut down, then farmers will lose their jobs and a source of income. Therefore, to the benet of the business, another alternative can be used instead of pesticides. Also, if the business wants to continue the use of pesticides, farmers should be educated about how to use them without falling ill. The business must ensure that the environmental conditions remain satisfactory.

Break-Even Analysis

11

Bibliography "Break Even Point Analysis-Denition, Explanation Formula and Calculation:." Break Even Point Analysis Denition|Formula|Calculation-Equation-Contribution Margin Method-AdvantagesLimitations-Assumptions-Calculator-Example. N.p., n.d. Web. 16 Sept. 2012. <http://www.accounting4management.com/Break_even_analysis.htm>. Currie, Marla. "The Impact of Competition on Pricing Strategy." EHow. Demand Media, 14 Sept. 2009. Web. 12 Sept. 2012. <http://www.ehow.com/about_5417796_impact-competition-pricing-strategy.html>. "More Articles." BusinessDictionary.com. N.p., n.d. Web. 15 Sept. 2012. <http://www.businessdictionary.com/>. Rogers, Chris Dinesen. "Environmental Forces That Affect Business." EHow. Demand Media, 01 Apr. 2010. Web. 14 Sept. 2012. <http://www.ehow.com/list_6188939_environmental-forces-affect-business.html>. Rosenbloom, Brad Stone And Stephanie. "The Gloves Come Off at Amazon and Wal-Mart." The New York Times. The New York Times, 24 Nov. 2009. Web. 13 Sept. 2012. <http://www.nytimes.com/2009/11/24/business/24shop.html>. Vaysman, Igor, Ray H. Garrison, Eric W. Noreen, and Peter C. Brewer. Accounting Course, Cost Accounting Theory and Practice, ACC 9811. Boston, MA: McGraw-Hill/Irwin, 2008. N. pag. Web. Bradford, Harry. "Walmart Prices 20 Percent Lower Than Amazon's On Average: Study." The Huffington Post. TheHufngtonPost.com, 22 June 2012. Web. 16 Sept. 2012. <http://www.hufngtonpost.com/2012/06/22/walmart-prices-20-percent_n_1618884.html>.

Borrington, Karen, and Peter Stimpson. IGCSE Business Studies. London: John Murray, 1999. Print.

Break-Even Analysis

12