...ADC Info #3
Rob Holland Assistant Extension Specialist Agricultural Development Center
One of the most common tools used in evaluating the economic feasibility of a new enterprise or product is the break-evenanalysis. The break-even point is the point at which revenue is exactly equal to costs. At this point, no profit is made and no losses are incurred. The break-even point can be expressed in terms of unit sales or dollar sales. That is, the break-even units indicate the level of sales that are required to cover costs. Sales above that number result in profit and sales below that number result in a loss. The break-even sales indicates the dollars of gross sales required to break-even. It is important to realize that a company will not necessarily produce a product just because it is expected to breakeven. Many times, a certain level of profitability or return on investment is desired. If this objective cannot be reached, which may mean selling a substantial number of units above break-even, the product may not be produced. However, the break-even is an excellent tool to help quantify the level of production needed for a new business or a new product....
...Breakevenanalysis is an important part in production management and decision making. In this assignment, the key elements of the break-evenanalysis will be discussed. The key elements of break-evenanalysis are fixed cost, variable cost, total revenue, break-even point and margin of safety. Although break-evenanalysis is very useful, it has disadvantages.
Break-evenanalysis is based on the production cost of the company which includes the fixed cost and variable cost. Then the total cost of the production is compared with the total sales revenue to find out the breakeven point. The breakevenanalysis is useful to determine how much sales does the company need to make in order to breakeven. (Holland, 1998) It is broadly used in management and forecasting in sales. A manager might use break-evenanalysis to determine the break-even point to make decision on setting the price of the product. The break-evenanalysis also provides information on the profitable of the products. The company will decide whether they still need to sell products that generate...
A breakevenanalysis is a method used widely by businesses to assist them with finance. The breakevenanalysis shows a business when their amount of revenue is equal to their costs. This is known as the break-even point. Although the breakevenanalysis shows many other things, this is the main thing companies look out for when composing a breakeven graph. The breakevenanalysis is very important to businesses as it a way of measuring their success over a certain period of time. The breakevenanalysis also allows businesses to plan ahead by looking at their present financial status. Although breakeven charts are beneficial there are some limitations:
▪ Breakevenanalysis doesn’t tell a business about what sales are actually likely to be for the product at these various prices.
▪ It assumes that fixed costs are always constant which sometimes may not be the case.
▪ It assumes that quantity of goods produced are the same as the quantity of the goods sold, which is certainly not the case in most businesses.
To show the breakeven...
In business planning, asking the proper questions and obtaining answers to those questions is arguably the most important thing. Questions such as; how much do we have to sell to reach our profit goal? How much do our sales need to increase in order to cover a planned increase in advertising costs? What price should we charge to cover our costs and allow for the planned profit goals? Is our business going to be profitable? Answers to such difficult questions become accessible with the utilization of the breakevenanalysis. Breakevenanalysis can be conceived arguably as one of the simplest tools in accounting; however, its simplicity does not take away from its importance.
Breakevenanalysis is used in cost and managerial accounting along with capital budgeting to evaluate projects or product lines in terms of their volume and profitability relationship. Essentially it helps business owners to understand how much product they have to sell to cover all expenses. Total expenses consist of two cost components; fixed and variable costs. Fixed costs are the expense items which generally do not change from month to month, regardless of how much you sell, use, or produce. On the flip side, variable costs are those expenses that change with the unit level of either production or...
University of Phoenix
Accounting in Healthcare
November 26, 2010
Relevance of DRG Analysis as a Tool in Healthcare
DRG analysis helps managers in health care determine levels of service at which to operate and to breakeven as well as avoid any loses. Using the DGR analysis, management will be able to determine the appropriate levels at which to operate making the most of any profits (Steven, & David, 2000). The management team of the health care organization will able to determine the level at which marginal costs are at a minimum hence maximizing profits on services in excess of the breakeven figure. Using the DRG analysis, the organization will be able to arise with strategies that minimizes costs and operate at levels of service above the break-even point so that the organization does not incur any losses in revenue.
Calculation of BreakEven Points
Contribution = sales – variable cost
Therefore, contribution margin for each DRG is calculated as follows:
Figures (/unit) DRGM DRGJ DRGP
Sales (in $) 1700 2600 900
Less Variable cost ($) (1000) (1200) (600)
Contribution ($) 700 1400 300...
...PRACTICE QUESTIONS ON BREAK-EVENANALYSIS
1. A small firm intends to increase the capacity of a bottleneck operation by adding a new
machine. Two alternatives, A and B, have been identified and the associated costs and revenues
have been estimated. Annual fixed costs would be $40,000 for A and $30,000 for B; variable
costs per unit would be $10 for A and $12 for B; and revenue per unit would be $15 for A and
$16 for B.
a) Determine each alternative’s break-even point in units.
b) At what volume of output would the two alternatives yield the same profit?
c) If expected annual demand is 12,000 units, which alternative would yield the higher profit?
2. A manager must decide how many machines of a certain type to purchase. Each machine can
process 100 customers per hour. One machine will result in a fixed cost of $2,000 per hour while
two machines will result in a fixed cost of $3,800 per hour. Variable costs will be $20 per
customer and revenue will be $45 per customer.
a) Determine the break-even point for each scenario.
b) If estimated demand is 90 to 120 customers per hour, how many machines should be
3. Manufacturing Inc. (MI) is considering the following two alternative technologies, differing in
terms of their fixed and variable costs, for producing its new product.
Grace L. Harden
University of Phoenix
January 30, 2011
Getwell Clinic on Beach Street concentrates care and treatment of three different types of patients listed as DRG-M, DRG-J, and DRG-P. Dr. Barkley is the new director of the satellite office and has requested that statistical break-even points be completed for each DRG. He would also like information on which DRG is the most profitable to promote in the growing practice.
Diagnosis-Related Groups (DRG) is a classification process in which health care organizations can separate patients into like categories even though patients have such broad differences. These classifications could be demographics, treatment, age, or diagnostic groupings. This helps determine the resources needed for patient treatment and the costs associated with the treatment. Understanding the breakdown of patient groupings managers can review them and better understand the services rendered, and if a service should be added or concluded from the practice. Managers will also be able to determine if maximum advertising will need to take place to reach capacity, or if the service is already reaching capacity. “Break-evenanalysis determines the volume at which a program or service is just financially self-sufficient. At...
...WENDY STEDMAN, UNIT 5
Deer Valley Lodge, a ski resort in the Wasatch Mountains of Utah, has plans to eventually add five new chairlifts. Suppose that one lift costs $2 million, and preparing the slope and installing the lift costs another $1.3 million. The lift will allow 300 additional skiers on the slopes, but there are only 40 days a year when the extra capacity will be needed. (Assume that Deer park will sell all 300 lift tickets on those 40 days.) Running the new lift will cost $500 a day for the entire 200 days the lodge is open. Assume that the lift tickets at Deer Valley cost $55 a day. The new lift has an economic life of 20 years. Assume that the before-tax required rate of return for Deer Valley is 14%. Compute the before-tax NPV of the new lift and advise the managers of Deer Valley about whether adding the lift will be a profitable investment. Show calculations to support your answer. Assume that the after-tax required rate of return for Deer Valley is 8%, the income tax rate is 40%, and the MACRS recovery period is 10 years. Compute the after-tax NPV of the new lift and advise the managers of Deer Valley about whether adding the lift will be a profitable investment. Show calculations to support your answer. What subjective factors would affect the investment decision?
1. Investment = $2,000,000 + $1,300,000 = $3,300,000
Annual cash inflow = 300 skiers x 40 days x...