Break even analysis which is cost –volume-profit analysis is used to plan and assist in decision making by clarifying the effect of changes in volume and business profitability. In calculating breakeven fixed cost and contribution by unity is calculated;
- Break-even-point = fixed cost
- Contribution per unit
- Contribution per unit= sales price – variable costs.
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In this case we shall beginning by calculating the variable cost per unit which is $ 0.5 and the selling price per unit is $ Before we calculate the number of juices per a day an important assumption must be made. This assumption is “the cost of the new machine will be absorbed in one year’s time that is depreciation will be for one year.
- Contribution per unit= $ 2 – $ 0.5.
- Therefore break-even-point is = 50,000 = 33,333 per year
- Number days in year 5/7 x365 = 261
- Therefore the juices per day are 128 juices per day.
- If the cost increase by 0.5 the answer will change and
- The break-even-point will be 50,000 = 50,000 per year
- Therefore the juices per day are 192 juices per day.
There are many factors to be considered before making the decision to purchase the equipment these factors include the availability of capital either internal or external. The capital is affected by capital rationing or complete available due to usage of resources available and having big capital structure. The second factor to considered is whether he has employees with technical know how on how to use the machine. Lastly the hygienic nature of the machine will also take into consideration.
In calculating the total cost per unit all costs will be considered. The total cost will be as follows;
He should accept the offer if the out sourcer is not giving alternative two. However if alternative two is available he should go for alternative 1 and reject this alternative.
In this case the best alternative is outsourcing at a cost of 9 per mail box per month as it is cheap.
- Ask, U, Ax, C. and Johnson’s (1996); cost management in Sweden: from modern to post modern management accounting
- Drury C; (2000); Management and cost Accounting;5th edition ,business press Thomson Learning,
- Wald J (2000) Biggs’s Cost accounting; The English Language Book Society and MacDonald and Evans Ltd London & Plymouth
Read about Break-even Analysis at Coca-cola Company
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