break-even analysis further uses unit 5 operations management
TRANSCRIPT
![Page 1: Break-Even Analysis Further Uses Unit 5 Operations Management](https://reader030.vdocuments.mx/reader030/viewer/2022032802/56649e045503460f94aefa01/html5/thumbnails/1.jpg)
Break-Even AnalysisFurther Uses
Unit 5 Operations Management
![Page 2: Break-Even Analysis Further Uses Unit 5 Operations Management](https://reader030.vdocuments.mx/reader030/viewer/2022032802/56649e045503460f94aefa01/html5/thumbnails/2.jpg)
Learning Objectives
HL – Use these methods to analyse the effects of changes in price or cost on break even , profit and margin of safety
HL - Calculate the required output level for a given target revenue or profit
Analyse the assumptions and limitations of break even analysis
![Page 3: Break-Even Analysis Further Uses Unit 5 Operations Management](https://reader030.vdocuments.mx/reader030/viewer/2022032802/56649e045503460f94aefa01/html5/thumbnails/3.jpg)
Break Even Analysis
• Can also be used to assist managers in making key decisions
• Charts can be redrawn showing a potential new situation – this can then be compared with the existing position of the business
• 3 examples of further uses of break even technique
HL
![Page 4: Break-Even Analysis Further Uses Unit 5 Operations Management](https://reader030.vdocuments.mx/reader030/viewer/2022032802/56649e045503460f94aefa01/html5/thumbnails/4.jpg)
1. A marketing decision
• Impact of the price increase, this will raise the sales revenue line at each level of quantity sold
HL
![Page 5: Break-Even Analysis Further Uses Unit 5 Operations Management](https://reader030.vdocuments.mx/reader030/viewer/2022032802/56649e045503460f94aefa01/html5/thumbnails/5.jpg)
Units of output
0
Cost
s an
d sa
les
reve
nue
Sales
Full Capacity
Sales Revenue 2
Where is the new break even?
HL
![Page 6: Break-Even Analysis Further Uses Unit 5 Operations Management](https://reader030.vdocuments.mx/reader030/viewer/2022032802/56649e045503460f94aefa01/html5/thumbnails/6.jpg)
2. An operations management decision
• Purchase of new equipment with lower variable costs, this will lower the variable cost line at each level of quantity
HL
![Page 7: Break-Even Analysis Further Uses Unit 5 Operations Management](https://reader030.vdocuments.mx/reader030/viewer/2022032802/56649e045503460f94aefa01/html5/thumbnails/7.jpg)
Units of output
0
Cost
s an
d sa
les
reve
nue
Sales
Full Capacity
Fixed costs 2
Total cost 2
HL
![Page 8: Break-Even Analysis Further Uses Unit 5 Operations Management](https://reader030.vdocuments.mx/reader030/viewer/2022032802/56649e045503460f94aefa01/html5/thumbnails/8.jpg)
3. Choices• Choosing between 2 locations for a new
factory – with different fixed and variable costs
HL
![Page 9: Break-Even Analysis Further Uses Unit 5 Operations Management](https://reader030.vdocuments.mx/reader030/viewer/2022032802/56649e045503460f94aefa01/html5/thumbnails/9.jpg)
Target Revenue and Profit• Adapted version of the break even formula
can be used if the business wants to determine a target profit level and establish the level of output required to achieve it
• Formula changes to
Target profit level of output =
Fixed costs + target profit
Contribution per unit
If the target profit is $25,000, fixed costs are $200,000 and contribution per unit $50Level of output needed to earn the target profit is
HL
![Page 10: Break-Even Analysis Further Uses Unit 5 Operations Management](https://reader030.vdocuments.mx/reader030/viewer/2022032802/56649e045503460f94aefa01/html5/thumbnails/10.jpg)
Break Even Revenue
• The amount of revenue needed to cover both fixed and variable so that the business breaks even
HL
![Page 11: Break-Even Analysis Further Uses Unit 5 Operations Management](https://reader030.vdocuments.mx/reader030/viewer/2022032802/56649e045503460f94aefa01/html5/thumbnails/11.jpg)
An evaluation – Usefulness
• Charts are relatively easy to construct and interpret• Useful guidelines to management on break even
points, safety margins and profit / loss levels at different rates of output
• Comparisons can be made between different options by constructing new charts to show changed circumstances
• Equation produces a precise break even result• Can be used to assist managers when taking
important decisions
![Page 12: Break-Even Analysis Further Uses Unit 5 Operations Management](https://reader030.vdocuments.mx/reader030/viewer/2022032802/56649e045503460f94aefa01/html5/thumbnails/12.jpg)
An evaluation - Limitations
• The assumption that costs and revenues are always represented by straight lines is unrealistic
BE1 BE2
TC
SR
FC
![Page 13: Break-Even Analysis Further Uses Unit 5 Operations Management](https://reader030.vdocuments.mx/reader030/viewer/2022032802/56649e045503460f94aefa01/html5/thumbnails/13.jpg)
An evaluation - Limitations
• Not all costs can be conveniently classified into fixed and variable costs (semi – variable costs)
• No allowance for stock levels, break even chart assumes all units produced are sold
![Page 14: Break-Even Analysis Further Uses Unit 5 Operations Management](https://reader030.vdocuments.mx/reader030/viewer/2022032802/56649e045503460f94aefa01/html5/thumbnails/14.jpg)
![Page 15: Break-Even Analysis Further Uses Unit 5 Operations Management](https://reader030.vdocuments.mx/reader030/viewer/2022032802/56649e045503460f94aefa01/html5/thumbnails/15.jpg)
(iii) Evaluate the usefulness of using break even charts (8)
![Page 16: Break-Even Analysis Further Uses Unit 5 Operations Management](https://reader030.vdocuments.mx/reader030/viewer/2022032802/56649e045503460f94aefa01/html5/thumbnails/16.jpg)
Answers
![Page 17: Break-Even Analysis Further Uses Unit 5 Operations Management](https://reader030.vdocuments.mx/reader030/viewer/2022032802/56649e045503460f94aefa01/html5/thumbnails/17.jpg)
Answers
![Page 18: Break-Even Analysis Further Uses Unit 5 Operations Management](https://reader030.vdocuments.mx/reader030/viewer/2022032802/56649e045503460f94aefa01/html5/thumbnails/18.jpg)
Answers