Assignment 3 - break even case PDF

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Assignment 3...

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Assignment 3 BUS 5110 Managerial Accounting Term 1, 2019 You are a cost management consultant and you have been asked by a small business owner for business advice. Your client owns a chain of small, local operations that support larger caterers for special events. Your client provides the tents for outside events, the soft drinks and snacks for the children of events, along with floral and other decorative arrangements. This kind of business is extremely competitive, and your client would like to know what her break point is in units. Currently, the chain of operations has $22,500,000 of revenue from 5,000 events that they have serviced. The cost data she can provide you includes: •

Floral costs, $200 per event,

•

Table arrangements, $100 per event,

•

Soft drinks and children snacks, $500 per event,

•

Annual allocated costs of tents and other structures, $500,000,

•

Annual allocated costs of trucks and vehicles, $2,000,000,

•

Annual costs related to maintaining permanent staff, $3,500,000,

•

Wage for temporary staff (paid per event), $1,800 per event.

You begin your analysis, of course, with a break-even calculation. Superior papers will: •

Provide an accurate solution.

•

Provide a narrative that defines and discusses the purpose of assigning cost categories of fixed and variable costs.

•

Provide a narrative that defines and discusses the relationship of variable costs to contribution margin.

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Provide a narrative that discusses the limitations of the data.

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Provide a narrative that speculates what data is missing from the case

INTRODUCTION The assignment of the current week revolves around the concept of variable, fixed cost type and process of CVP (cost volume profit model). Before solving the case study and its analysis we will first understand the basic theoretical concept. Variable cost is the cost component which changes with relation to the variation in job task, type and quantity. This component forms the direction relation to the quantity of jobs produced, i.e., it increases with increase in job quantity and decreases with decrease in quantity. Direct material cost, freight charges, commissions form components of variable type cost.

On the other hand, the fixed cost does not vary with the quantity of job tasks and is independent of it. This is a form of liability for the organization which must be paid back on recurring basis irrespective of presence of business activity. The same liabilities when cleared, forms the organization’s assets. The business setup including property, infrastructure, purchased supply chain, etc. are few examples of the initial investment and forms the organization’s fixed cost elements.

There are some forms of costs which has the both fixed and variable component and hence forms the mixed cost or semi-variable cost. This could be best understood by the example of a transportation system of an organization where the vehicles when initially purchased forms the fixed costing part and since each run has some of the running cost associated with it in the form of fuel, maintenance, then those components form the variable part. In such case, the transport network forms as mixed cost component.

THE CASE STUDY The case states some key components of the business which has been summarized under a segment classification of variable and fixed cost: Total Events (Q) Net Revenue Per event revenue (also beocmes sale price)

5000 $22,500,000 $4,500

Variable Cost Components Event Component Cost per Event Floral $ 200 Table Arrangement $ 100 Soft drinks and snacks $ 500 Temporary Staff $ 1,800 Fixed Cost Components Component Annual Cost Tents and structures $ 500,000 Trucks and vehicle $ 2,000,000 Maintaining Staff $ 3,500,000

The key component of any business lies within the break-even analysis. The break-even point is the state of business where the level of sales equalizes zero net income. Such analysis is important to understand the business stability, outcome and plan further budgeting. The identification of break-even point is calculated as follows: “Profit = (Sale Price * Quantity) - (Variable cost * Quantity) –Fixed cost” (Bragg, 2019) As the break -even point is the state where net profit is zero, hence keeping profit =0, “0 = (Sale Price * Quantity) - (Variable cost * Quantity) –Fixed cost” (Bragg, 2019) Hence, “Break Even point quantity = Fixed Cost / (Sales price – Variable price)” (Bragg, 2019) Based on this the calculations are as follows: 1. Identification of per event price based on total revenue, this becomes the sale price of each event 2. Identification of net variable cost and fixed cost based on data from the case study 3. Identification of breakeven point quantity and amount as per break even calculation

Annual Cost Expenditure = Sum of Fixed component cost + Sum of variable Sum of fixed cost Sum of variable cost Total Annual Cost Annual Profit = Net Revenue - Annual Cost Net profit

$ $ $

6,000,000 13,000,000 19,000,000

$3,500,000

Break even point calculation (cosnidering 0 net profit as break even point) Profit = (Sale price * No of events) - (Variable Cost * No of events) - Fixed Cost (using this we identify the no of events reuquired for break even point) Break even point (No of events ) 3158 Break Even Price $ 14,210,526

Based on calculation the graph is as follows:

Case Study Analysis and Conclusion 1. The business data shows that it has been at par break – even point after 3158 events and has generated a net profit of $3,500,000. 2. Although the data shows effective variable and fixed component, the major drawback lies in the consideration of market fluctuations on variable component. On the other hand the fixed components likes tents and tables , vehicles would lie in mixed cost type as there would be a cost associated for tent & vehicle maintenance and vehicle running cost for each event.

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