Assuming all capital expenditure is depreciated on straight line over its useful economic
life.
Annual breakeven quantity = Total Fixed Costs (w1) / Selling price – Variable costs (w2)
Workings:
Annual breakeven quantity = Total Fixed Costs (w1) / Selling price – Variable costs (w2)
Assuming all capital expenditure is depreciated on straight line over its useful economic
life.
Annual breakeven quantity = Total Fixed Costs (w) / Selling price – Variable costs
Workings:
Annual breakeven quantity = Total Fixed Costs (w1) / Selling price – Variable costs
Workings:
(W1) Annual Fixed Costs:
£ £
Sealing Machines & Scales ( As above) 56
Creation Of website (250 / 5) 50
Maintenance of website (£50 x 12 Months ) 600
Internet Company Payment (£30 x 12 Months) 360
Broadband Access (£20 x 12 Months) 240
Soil Association Annual Fee 440
Total Annual Fixed Costs 1,746
Mina‘s business is currently profitable, she has a healthy a profit margin and has small
amount of fixed costs.
Her breakeven point is to sell 87.5 bags which she can produce in about 9 hours. She can
recover her annual fixed costs after she sell 87.5 bags, this is about 7.3 weeks (87.5/12)
worth of her usual 12 bags sales.
However, mina is now considering new ideas to expand her business to the point where
she can achieve an annual profit of £ 10,000.
One option is to sell on the internet, in order for this option to be viable mina needs to
consider a number of factors:
If she decide to invest in creating a website for her business and acquires internet access,
her fixed costs will increase significantly and hence her breakeven quantity. She, in this
case, needs to sell about 1,322 bags before she can cover her annual fixed costs.
This is a huge increase in costs compared to the current costs, however she only need to
work about 2 hours & 45 minutes to produce her breakeven quantity, and considering she
is willing to work about 20 hours a week, this option is within her target labour hours.
To achieve her target profit however, she will need to sell around 11,443 bags of her
product, this will require her to put at least about 24 hours of labour a week to produce
this quantity. This is 4 hours in excess of what she is willing to work.
In addition to this, more time will be probably needed for packing and shipping. This is
clearly more than what she is willing to work and unless she will be prepared to work
extra hours, it’s maybe safe to say that she may not be able achieve her target profit.
Another way is how she could possibly compromise this, is to reduce her extra fixed
costs, maybe by trying to find cheaper internet providers as well as a better deal to set up
her business website and its maintenance.
The second option for her to expand her business is by the use of organic labels on her
product, this can be made with or without the internet sales.
This in general will lead to significant increase in her annual fixed costs, her breakeven
quantity and her labour hours. It however should occur in concurrent with an increase in
sales.
If she is to use both internet sales and organic labels, it’s needless to say that she will
need to increase her labour hours per week to meet her breakeven quantity and
subsequently to make profit.
To achieve her £10,000 annual profit target, she will need to sell about 11,889 bags, this
require her to work approximately around 25 hours a week, which again is outside her
projected labour hours.
Again, unless she is prepared to work more hours, she should not use this option, as
previously stated this may be compromised by finding a way by which she can reduce her
annual costs.
The above analysis assumes that sales will increase due to the proposed changes and that
sales will occur constantly and evenly throughout the year.
Figures used in this analysis are based on the calculation made in the Appendices as well
as previous workings.
Appendices:
Calculation of hours of labour required to achieve breakeven quantity
If:
- 2.5 hours are required to produce 12 kg of Muesli
- 12kg = 24 bags of 500g Muesli
1) Internet sales = 0
4) Internet sales = 0