Breack Even Point Coursework Example | Topics and Well Written Essays - 1500 words

Breack Even Point - Coursework Example The breakeven point is also taken into consideration by the management for finalising the marketing budget and other vital expenses for a particular month, quarter or year. Breakeven analysis is also necessary for new entrants to determine the total capital requirement for starting a business. In reality, majority of the companies need approximately 18 months to reach a point from where they can start making profit. Until then, the company needs extra capital (working capital) to run the business. Breakeven analysis is one such vital tool that assists in understanding when the business will start generating profit, how much extra working capital should be arranged and how much money should be allocated for marketing and other vital activities. The given project will attempt to discuss breakeven analysis in depth to understand how it is conducted, what are the factors that should be used while determining the breakeven point. The concept will be discussed with help of a numeric exampl e so one can understand the real life application of this analytical tool in the decision making process. â€Å"Breakeven point is the point of zero profit† (Hansen, Mowen & Guan, 2007, p.591). In simple words it can be said that breakeven point is a sales volume at which the revenue earned by a firm equals the cost incurred within a specific time period. While developing the business plan for a new venture, the management takes into account different types of costs that will be incurred in the business process. The management then decides the profit margin on the products and hence the final selling price per unit is determined. Considering the total cost as well as the selling price per unit, the management determines the minimum sales so that the company can pay for all the expenses without making any profit. There are two commonly used approaches to determine the breakeven point; it can be

Business Economics for the World Market Essay Example | Topics and Well Written Essays - 750 words

Business Economics for the World Market - Essay Example Based on this analysis the total costs of the project exceed the present value of future sales. It is true that the total costs of the project exceed the present value of future sales, but we have to consider the R&D costs were already incurred. If the company were to decide to reject the project the R&D expenses would become a sunk cost. A sunk cost can be defined as cost that has been incurred that cannot be reversed (Investopedia). If the firm decided to forfeit the project the accumulated sunk cost would lead to a project loss of $8 million. On the hand if the firm decided to invest an additional $4 million dollars the firm would end up with a final project loss of $2 million. It is better to lose $2 million than to lose $8 million. Another possibility of continuing the project is for the company to create extension products or other related product lines in the future. These products could help improve the total performance of the project in order to reach profitability. Another consideration for the company is that producing this product can help the firm improve its overall market share in the industry. The firm should have performed a better analysis of the potential returns of the project much earlier in the project life cycle. Since the firm already invested $8 in research and development the best decision is to continue with the project. I do not agree with the recommendation of canceling the project. The firm made bad decision in the past to undertake the project and invest $8 million in R&D without having a good estimate of the potential returns of the project. Right now rejecting the project at its current development stage would compound the original problem. 1b) The new information given that the marketing and overhead expenses associated with continuing the project amount to $4 million does not change my opinion about the best solution for the firm. Based on the new figures the company would lose $6 million if they continue with the project. If the firm decides to discontinue the project the overall loses for the project would be $8 million. The company should continue with the project in order to learn from their experiences. Based on the new information I would be more willing to reject the project if the financial conditions are not correct. For instances if the company does not have the $8 million dollars readily available I would recommend the company does not go out of their way to incurred in moves such as selling common stocks to finance this project. The firm should implement changes in its risk assessment protocols for new products or capital projects in order to incorporate the utilization of methods such NPV to assess the viability of a project prior to investing money in research and development initiatives. 2) The video rental store owner would have benefited a lot from having more knowledge about economic concepts. It is possible that the owner made a decision based on the law of demand and supply which sti pulates that by lowering the price of an item the volumes of sales will go up as a consequence. The error the video rental owner made is that he did not consider the implications of having a price of elasticity of -0.45. The price elasticity of demand is an economic variable that measures the responsiveness of the quantity demanded of a good or service to a change in its price (Absoluteastronomy). The price elasticity of the firm can be categorized as relative elastic since the value of -0.45 which is between cero and -1. This implies