FINANCIAL EXCEL

2010
Managerial Applications
Breakeven Model

Is the analysis of the level of sales at which a company would

make a zero profit

Total Revenue = Total Costs

Managerial Applications
Breakeven Model
Graphical
Break-even Analysis
Method

Break-Even Units

Fixed Costs Variable Costs

Profits

Costs $

Losses

Production Units
 Managerial Applications
Breakeven Model
Equation A common equation method for computing the break-even point is
Method

Revenues – Variable Costs – Fixed Costs = Operating Income

Or

(USP x Q) – (UVC x Q) – FC = OI

unit selling price quantity sold unit variable costs fixed costs operating income

At the break-even point, operating income is zero

Managerial Applications
Breakeven Model
Equation
Method (USP x Q) – (UVC x Q) – FC = OI
At the break-even point, operating income is zero

(USP x Q) – (UVC x Q) – FC = 0
Q (USP - UVC) = FC
Q = FC / (USP – UVC)

Fixed Cost
Break Even Units = ---------------------------------------
Unit Contribution Margin (UCM)
Managerial Applications
Breakeven Model
Equation A Company K sales representative travels to a client’s location to promote a new product.
Method The unit selling price for the product is $200. The fixed costs for the product are $4,000.
The unit variable costs for the product are $100, and the current quantity of the product
sold is 75.
USP = $200
The break-even point (expressed in units) is calculated as FC = $4,000

(USP x Q) – (UVC x Q) – FC = OI UVC = $100

Sales 75 Unit
($200 x Q) – ($100 x Q) – $4,000 = $0

$100 x Q = $4,000

Q = $4,000 / $100 = 40 Unit

In this example, selling fewer than 40 units will be a loss; selling

40 units will be break-even; selling more than 40 will make a
profit
Managerial Applications
Breakeven Model
Contribution Margin
Method The contribution margin method is an algebraic adaptation of the equation method

Fixed Cost + Operating Income

Break Even Units = ---------------------------------------
Unit Contribution Margin (UCM)
Managerial Applications
Breakeven Model

Crest industries sells a single model of satellite radio receivers for use in the home. The radios have the following price
and cost characteristics
Sales Price $80 per radio
Required:
Variable Costs $32 per radio
What number must crest sell per month to breakeven ?
Fixed Costs $360,000 per month

360,000 Crest is subjected to income tax 40%

Break Even Units =--------------------------- = 7,500 Unit
80 - 32
Managerial Applications
Breakeven Model

Crest industries sells a single model of satellite radio receivers for use in the home. The radios have the following price
and cost characteristics
Sales Price $80 per radio
Variable Costs $32 per radio
Required:
What the breakeven point in sales dollars ? Fixed Costs $360,000 per month

Crest is subjected to income tax 40%

= 7,500 Unit * 80 = $ 600,000
Managerial Applications
Breakeven Model

Crest industries sells a single model of satellite radio receivers for use in the home. The radios have the following price
and cost characteristics
Sales Price $80 per radio
Required: Variable Costs $32 per radio
What number must crest sell to make an operating profit
$90,000 for the month ? Fixed Costs $360,000 per month
Crest is subjected to income tax 40%

360,000 + 90,000
Break Even Units =--------------------------- = 9,375 Unit
80 - 32
Managerial Applications
Breakeven Model

Crest industries sells a single model of satellite radio receivers for use in the home. The radios have the following price
and cost characteristics
Sales Price $80 per radio
Required: Variable Costs $32 per radio
What number must crest sell to make an operating profit
$90,000 after tax ? Fixed Costs $360,000 per month
Income Crest is subjected to income tax 40%
Income After tax =
1- Tax Rate

360,000 + (90,000 / 60%)

Break Even Units =---------------------------------- = 10,625 Unit
80 - 32
Managerial Applications
Construct Income Statement and get the breakeven Unit in number
Sales @ 1,000 Unit 1,000 Unit @ $15 Breakeven Units
Variable Costs
Commission 3/Unit Income Statement
Material Costs 2/Unit Sales @ 1,000 Unit 15,000.00
Transportation 1/Unit Variable Costs
Commission 3,000.00
Misc. Costs 1.5/unit
Material Costs 2,000.00
Total Variable Costs
Transportation 1,000.00
Fixed Costs Misc. Costs 1,500.00
Admin Costs 1,500.00 Total Variable Costs 7,500.00
Rent 1,200.00 Fixed Costs
Property Tax 200.00 Admin Costs 1,500.00
Insurance 450.00 Rent 1,200.00
Misc. Costs 500.00 Property Tax 200.00
Total Fixed Costs Insurance 450.00
Misc. Costs 500.00
Total Fixed Costs 3,850.00
Profit (Loss) 3,650.00
Inventory Control Model
Inventory Management:
is a core operation management activity

Good Inventory Management Poor Inventory Management

• Successful operations and their • Hampers operations

Supply chains • Diminishes customer satisfaction
• Enhance customer satisfaction • Increase operational costs
• Decrease operational costs
Inventory Control Model
Two big Questions to be asked in Inventory control

How Much should be ordered ?

The Basic Economic Order Quantity Model

The Economic Production Quantity Model

The Quantity Discount Model

When should be ordered ?

Inventory Control Model
The Basic Economic Order Quantity Model
Is the simplest of the three models. It is used to find a fixed order quantity that will minimize total
annual inventory costs.

This model involves some assumptions:

1. Only one product
2. Annual demand requirements are known
3. Demand is spread evenly throughout the year
4. Lead time doesn't vary
5. Each order is received in single delivery
6. No quantity discounts
Inventory Control Model
The Basic Economic Order Quantity Model
Quantity on hand

Re-Order Point

Place Receive Time

Order Order

Lead Time
Inventory Control Model
The Basic Economic Order Quantity Model

Demand in Units

Order Costs/Unit

Holding Costs/Unit
Inventory Control Model
The Basic Economic Order Quantity Model

Recorder Point = Lead time * Daily Demand

Annual Demand
Daily Demand =
No. of days per year

Annual Demand
Number of orders =
Economic Order Quantity
Inventory Control Model
The Basic Economic Order Quantity Model
The annual demand for Fizzy Apple is assumed to be approximately constant at 200,000 cases. It costs $200 to place an
order with the supplier, and each case of fizzy apple costs R&B $25. the annual inventory holding costs per unit is 20% of
the cost of item. R&B soft drinks company operates 300 days per year. In addition when a new order is placed with the
supplier, it takes two days for the order to reach R&B warehouse. Given these data regarding Fizzy , management would
like to answer the following questions :

What is the minimum cost order quantity of Fizzy Apple ?

= 2 * 200,000 * 200
= 4,000 Cases / Order
(20% * 25)
Inventory Control Model
The Basic Economic Order Quantity Model
The annual demand for Fizzy Apple is assumed to be approximately constant at 200,000 cases. It costs $200 to place an
order with the supplier, and each case of fizzy apple costs R&B $25. the annual inventory holding costs per unit is 20% of
the cost of item. R&B soft drinks company operates 300 days per year. In addition when a new order is placed with the
supplier, it takes two days for the order to reach R&B warehouse. Given these data regarding Fizzy , management would
like to answer the following questions :

How many orders will be placed per year and what is the length of time between orders ?

Number of Orders = 200,000 / 4,000 = 50 Order

Length of time between orders = (4,000 / 200,000) * 300 = 6 days

Inventory Control Model
The Basic Economic Order Quantity Model
The annual demand for Fizzy Apple is assumed to be approximately constant at 200,000 cases. It costs $200 to place an
order with the supplier, and each case of fizzy apple costs R&B $25. the annual inventory holding costs per unit is 20% of
the cost of item. R&B soft drinks company operates 300 days per year. In addition when a new order is placed with the
supplier, it takes two days for the order to reach R&B warehouse. Given these data regarding Fizzy , management would
like to answer the following questions :

What is the total annual inventory holding and ordering cost for this product ?

Total Costs = Holding Cost + Order Cost

4,000 200,000 = 20,000
* 5 + * 200
2 4,000
Inventory Control Model
The Economic Production Quantity Model
Is used when there is a production line (Batches) or in companies using process costing. So there will not be Ordering
Costs
Demand in Units

Delivery (Production) Rate

= 2DS P
H P-U Usage Rate

Holding Costs/Unit Inventory Remaining

Inventory Control Model
The Economic Production Quantity Model
Omega Optics makes microscope lens housing in batches to be used in one of its end products. Such end product is
produced in a continues production line which uses 50 units per days. The daily rate of producing the lens housing is 200
Units. Holding costs of one Unit for a year of such part is $10. Setup costs of a batch is $ 250. The company works 220
days a year.

Determine the economic run quantity ?

= 2DS P 2 *(50*220) 200

= = 856 Units
H P-U 10 200 - 50
Inventory Control Model
The Economic Production Quantity Model
Omega Optics makes microscope lens housing in batches to be used in one of its end products. Such end product is
produced in a continues production line which uses 50 units per days. The daily rate of producing the lens housing is 200
Units. Holding costs of one Unit for a year of such part is $10. Setup costs of a batch is $ 250. The company works 220
days a year.

Approximately how many runs per year will be there ?

= 50 * 220 / 856 = 12.8 Orders

Annual Demand
Inventory Control Model
The Economic Production Quantity Model
Omega Optics makes microscope lens housing in batches to be used in one of its end products. Such end product is
produced in a continues production line which uses 50 units per days. The daily rate of producing the lens housing is 200
Units. Holding costs of one Unit for a year of such part is $10. Setup costs of a batch is $ 250. The company works 220
days a year.

Compute the maximum inventory levels ?

Q 856
I max = ---------- (P-U) I max = ---------- (200- 50) = 642.2 Units
P 200
Inventory Control Model
The Economic Production Quantity Model
Omega Optics makes microscope lens housing in batches to be used in one of its end products. Such end product is
produced in a continues production line which uses 50 units per days. The daily rate of producing the lens housing is 200
Units. Holding costs of one Unit for a year of such part is $10. Setup costs of a batch is $ 250. The company works 220
days a year.

Determine the length of the pure consumption portion of the cycle ?

Q 856
Length of the cycle = ---------- Length of the cycle = ---------- = 17.12
U 50

Q 856
Production Time = ---------- Production Time = ---------- = 4.282
P 200
Inventory Control Model
The Economic Discounted Model
Prices are changeable
Demand in Units

= 2DS
H
Holding Costs/Unit
Inventory Control Model
The Economic Discounted Model
The Maintenance department of a large hospital uses about 816 cases of liquid cleanser annually. Ordering costs are $12
carrying costs are $4 per case a year, and the new price schedule indicates that orders of less than 50 cases will cost
$20 per case, 50-79 cases will cost $18 case, 80-99 cases will cost $17 per case, and the larger orders will cost $16 per
case.

Determine the optimal order quantity ??

2DS = 2 * 816 * 12
= = 70 Cases/Order
H 4
Inventory Control Model
The Economic Discounted Model
The Maintenance department of a large hospital uses about 816 cases of liquid cleanser annually. Ordering costs are $12
carrying costs are $4 per case a year, and the new price schedule indicates that orders of less than 50 cases will cost
$20 per case, 50-79 cases will cost $18 case, 80-99 cases will cost $17 per case, and the larger orders will cost $16 per
case.

Determine the Total Costs for each order??

The 70 Cases can be bought at $18 per Case

= (70/2) *4 + (816/70)*12 + (816)*18 = $14,968

Forecasting Models
Smoothing Methods
Are suitable for short term forecasting and it consists of two methods:
Moving Average
Exponential Smoothing

Moving Average

Sum of most recent data

Moving Average =
N “ Number of periods”
Forecasting Models
Smoothing Methods
Moving Average
Week Demand
1 17
2 21
3 19
4 23
5 18
17 + 21 + 19
Moving Average 3 weeks = = 19
3
Should be the forecast
for week 4

Forecast Error = Actual – Forecast

Forecast Error = 23 -19 = 4
Forecasting Models
Smoothing Methods
Exponential Smoothing
Week Demand
1 17
2 21
3 19
Next Forecast = Previous Forecast + α (Actual – Previous forecast)
4 23
5 18

Smoothing Constant “given”