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Break-even Analysis Lester M. Legette Trident University International

ACC501- Accounting for Decision Making Dr. Ralph Wayne Ezelle 05 March 2012

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Compute break-even at each level A break-even analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even analysis calculates what is known as a margin of safety, the amount that revenues exceed the break-even point. This is the amount that revenues can fall while still staying above the break-even point. Pringly division seems to break even at all anticipated levels. The breakeven point is calculated when total sales equal total cost. An example of this would be sales under the lower price level would be $25,500,000 and cost associated with this is $24,500,000 they broke even and had a profit of $1,000,000
Is the company likely to achieve its desired target profit of $4,000,000 or more? Support your discussion with financial analysis

It is likely that the desired profit will be met under both pricing conditions (see expected value in Excel, attached). The only time where Pringly will not meet its desired target is when the demand is for 150,000 in both pricing levels, however, there is a higher probability that the minimum profit will be exceeded and perhaps exceeded by a considerable margin (75% probability of meeting or exceeding). Should the company go ahead with the new product? The company should go ahead with the new product only if the demand is greater than 150,000. If they decide to go with the new product and the demand is 150, 000 or less then they will be disappointed with low sales once again. Would this type of analysis be useful to a large company with a wide range of products?

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This method would not be useful to a company such as Wal-Mart on every particular item. The company could use this on certain commodities such as flu shots to see if they could make money by offering this type of service. This would be too much to do on every particular item and should only be used on items that companies intend to generate a certain profit from in a specified time period. ROI (return on investment) and residual income are two other methods that can helpful for this type of decisions. Could they be applied in this situation? Support your answer with financial analysis. ROI is a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio. ROI is useful (assuming fixed costs are a good proxy for investment). Residual income is also possible and just requires knowing a required rate of return (I assumed 6%). ROI is used to compare investments and would not be useful in this situation because it would not give them an accurate reading of what there break-even point would be. Residual Income is the amount of income that an individual has after all personal debts. This would definitely not be a good tool to use, because it does not measure where the breakeven point is, and would not give an accurate reading on how to go forward with the selling of a new product.

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