Organic Fruit and Veg Business

Organic Fruit and Veg Business

calculate the marginal cost of producing one box of vegetables

• 9/2 = 4.5 (one box) 4.5+4 = $8.50 (actual cost of the vegetables)

state the formula for break-even in boxes (units)

• fixed costs/contribution per unit

calculate the break-even point in boxes (units)

• $4,500+$10,500+$2,00=$17,000 (fixed costs)
• $12-$8.50 = $3.50 (contribution)
• 17000/3.50 = 4857 boxes (breakeven point)

Sibon plc Manufacturers

contribution per unit sold

• 4 units break-even in units
• 2250 units

3 things that you could do to reduce the break even output

1. LOWER FIXED COSTS (rent/hire machinery instead of buy)
2. REDUCE VARIABLE COSTS (increases contribution/unit, however may cause lower quality)
3. INCREASE SELLING PRICE (increases contribution/unit, however demand may decrease)

EFFECTS ON BREAK-EVEN

• higher selling price = higher contribution/unit = lower breakeven output
• lower selling price = lower contribution/unit = higher breakeven output
• higher variable cost/unit = lower contribution/unit = higher breakeven output
• lower variable cost/unit = higher contribution/unit = lower breakeven output
• increase in fixed costs = no change to contribution/unit = higher breakeven output
• decrease in fixed costs = no change to contribution/unit = lower breakeven output

strengths of breakeven analysis

• focuses on what output is required before a business reaches profitability
• helps management and finance-providers better understand the viability and risk of a business or business idea
• margin of safety calculation shows how much a sales forecast can prove over-optimistic before losses are incurred
• illustrates the importance of keping fixed costs down to a minimum
• calculations are quick and easy

limitations of breakeven analysis

• unrealistic asumptions - products are not sold at the same price at different levels of output; fixed costs do vary when output changes
• sales are unlikely to be the same as output - there may be some build up of stocks or wasted output too
• variable costs do not always stay the same. for example as ouput rises the busienss may benefit from being able to buy inputs at lowers prices (buying power)
• most businesses sell more than one product
• a planning aid rather than a decision-making tool

plenary

profit = contribution - fixed costs therefore profit + fixed costs = contribution and contribution - profit = fixed costs

contribution = £15900 profit = 22500 - £20650 = £1850 FIXED COSTS = £15900 - £1850 = £14050

‎‎