It is critical for any new business to undertake a performance management evaluation to determine the businesses and identify a position at which the business is likely to break even on its investment and begin registering profits. This helps determine the number of products and time Green Motor Ltd needs to sell before it begins registering profits. It also helps determine how long the business will take to repay loans or capital invested into the business. This makes it critical for any new business to evaluate performance and undertake analysis so as to secure this data which can be used to improve the on areas of weakness (Bacal, 2012).
How the Economist’s and Accountant’s breakeven charts differ
It is important to understand predicted economists breakeven chart differs from the accountant’s break-even charts but both must be analysed together to help deliver a clear vision linked to breaking even analysis (Media, 2017).
The Economist’s breakeven chart is based on theoretical figures which are estimated and fixed. These results in delivering fixed expenses on an average between the markets high and low. This chart does not include variables and is limited to a single predictable line graph which is consistent and flows predictably. Timelines are have fixed flexibility delivered on a variable percentage of the predicted timeline which results in the chart being generalized and not very accurate when compared to the practical output of the projects performance and reporting schedule (Scarlett, 2005, p.168). This chart is usually developed as a guideline during the business planning process but will from the accountant’s break-even chart when compared after X duration.
The Accountants Breakeven Chart is the more accurate chart of the two due to it using true costs to create the chart. This results in the chart differing considerably by up to +/- 10% of the Economist’s breakeven chart. This chart will deliver a more accurate result related to the exact breakeven point for the business and can be calculated to a definite number. Unlike the economist’s chart this chart is dependent on data collected from the business sales, experiences and profits which results in the results also different every month (Cafferky, 2010). This makes the accountant’s break-even chart more accurate towards calculating a business’s monthly break-even rate after which the business can begin registering profits.
Both charts differ considerably due to one’s dependency on projected statistics while the other is uses practical expenses but both charts must be used alongside each other as they both deliver important statistics linked to how a business is projected to perform so as to register profits. These analyses can also be done for individual product sales on a monthly basis or to determine the businesses long-term breakeven point which allows the business owner to project a timeline at which the business can be expected to repay investment or loans used as capital.
Defining period of time, relevant range, and fixed cost
Fixed cost refers to costs which remain stable and predictable over a fixed period of time. A business does not have any fixed costs over the long term perspective but the costs can be fixed for a period of time. The long-term fixed cost in this situation refers to costs which remain stable for a period of 12 months or more. Costs such as Salaries, rent, loan instalments, depreciation rates, insurance, interest all for all under fixed costs (Khan & Jain, 2013).
Fixed costs must be paid despite the businesses having registered a profit or loss thus the business will need to dig into its profits and saving during periods which the sales targets may not be met. The business must, therefore, plan its sales and marketing plans carefully to cater for the lean season which attracts very low sales so as to help the business break even rather than register a loss. It is critical for the business to measure calculate the break-even costs for both the high and low seasons thus allowing them to determine the number of sales which must be achieved to keep the business profitable.
The term period of the term refers to the duration of time the cost remains fixed. In most situations, a business will enter into agreement with the stakeholders to deliver their services, be hired or supply the business with raw materials for a fixed cost over a 12 month period. This duration is classified as the fixed cost period of time in which a business can predict the cost it would incur. On the other hand, in many of the same contracts or agreement, the business will also state the amount of increment the service provider or supplier can expect on completion of the period. The rate differs and can be calculated by considering inflation, and raw materials and production costs. The business will in most situation state a range within which the service provider or supplier can expect an increment which is termed as the relevant range of increment after competition of the fixed period.
Calculating the break-even points allows a business to determine the exact or precise number of products that need to be sold so as to avoid incurring a loss must it’s important to also include a Margin of safety to this calculation to further protect the business from incurring a loss. This is achieved by determining a percentage of sales which needs to be increased above the break-even rate which can be used to calculate the projected targets which would be presented to the sales professionals and business stakeholders (Weygandt et al., 2009). Doing this delivers a buffer range within which the business can use to boost sales tams to increase sales before the business actually registers a loss.
This can be observed on the above Margin of safety chart where the margin of safety has been calculated at 10% of the actual breakeven point which shows a 10% increment in the number of sales the sales team need to target achieving on a monthly basis. The main reason for delivering a Margin of Safety is to ensure the business sales targets remain above the actual requirement thus helping avert losses which may occur due to the lack of meeting targets (Wylie, 2010). Having this margin of safety also provided the business at a fixed percentage of flexibility which the business can use make modification and changes to their marketing strategy before the business begins registering actual losses. The margin of safety can be calculated on any range of the business sales and profits thus delivers additional flexibility linked to the business’s performance.
|
Second Half |
Second Half |
||||
|
Units Sold |
50,000 |
Units Sold |
50,000 |
Units Sold |
50,000 |
|
Price |
40 |
Price |
38 |
Price |
36 |
|
Revenue |
390,000 |
Revenue |
100,000 |
Revenue |
110,000 |
|
Variable Expenses |
1,250,000 |
Variable Expenses |
1,220,000 |
Variable Expenses |
1,450,000 |
|
Contribution Margin |
2,000,000 |
Contribution Margin |
1,900,000 |
Contribution Margin |
1,800,000 |
|
Fixed Expenses |
360,000 |
Fixed Expenses |
580,000 |
Fixed Expenses |
240,000 |
The above table helps analyse the data for the two proposals and helps highlight which offers better gains and profitability. It is important to analyse every aspect related to the above data since business performance is not limited to profitability and logistics and other information and data must also be considered. It is critical to collect and compare the data from the two proposals and compare it to the current statistics to determine the most benefited proposal.
To calculate the profitability of the proposals it is important to base all calculation on a fixed number of units which will be 50000 units. This would allow for clearer analysis of the current performance as well as compare the proposals to determine the most appropriate approach to consider (Zaharuddin, 2009). Maintaining a fixed number will allow for a clear presentation to be made based on each proposals variable and fixed cost as well as the profitability which can be used to help determine the best properly based on the above mentioned criteria.
|
Second Half |
First Proposal |
Second Proposal |
|||
|
Total Expenses |
1,610,000 |
Total Expenses |
1,800,000 |
Total Expenses |
1,690,000 |
|
Expense difference |
190,000 |
Expense difference |
80,000 |
The analysis has also demonstrated that the proposals are considerably different each attracting different qualities which all must be carefully analysed to determine the more beneficial proposal. When reviewed it becomes quite clear that proposal 1 increases the expenses considerably by 190,000 but also helps increase the number of product sales through the reduced product price by a staggering 30%. These results in the proposal increasing the overall revenue generated by the business which results in registering a profit based on the volume of products sold. This helps the business secure higher sales which results in the business registering higher profits despite the business has reduced its product price which would technically result in reduced profit margins. On proposal one the strategy of increasing the number of sales has helped increase the profits generated by the business despite the business has reduced its profit margin. It has also expanded to shopping malls and paying higher rental which has to increase the fixed expenses and a risk as it places pressure on the business to secure sales to make profits.
On proposal 2 the business has actually cut the fixed and variable expenses by replacing the sales agents with direct commissions and further reducing the product price to make it more attractive. This has also increased the expenses by only 80,000 in form of commission payment for the individuals and businesses who sell the product. This also results in the business needing to retrench its sales team but helps limit the fixed and variable costs which can be re-diverted towards marketing and increase of sales.
To compare the current performance and proposals, 50,000 units shall be used as the fixed number to compare the data and determine better proposal. Proposal 1 and 2 differ considerably in profitability and expenses but both proposals have their own attractions. Proposal 1 attracts increased fixed expenses which could place further pressure on the business when sales volumes are low thus Proposal 2 seems to be the better option which delivers a fixed expanse rate based on the sales volume. Reducing fixed expanses reduced the pressure on Green Motor Ltd in case the business encounters an unexpected reduction in sales or competition. Maintaining commission based expenses helps fix the costs associated to each products sale this allowing the business to determine its expenses and limit overhead expenses. This helps relieve pressure from the business with relation to the fixed and variable expenses and allow the business determine the product expenses based on the sales volumes (SANT, 2012). The product price may increase due to the commission being charged but the commission will also encourage the service providers to sell the product which will help increase the sales volume without Green Motor Ltd needing to invest on renting additional space and paying utility bills which all contribute towards the businesses overall expenses.
Analysis of the 1st and 2nd half as well as the Proposal 1 and 2 reveals some important statistics which can be used to improve the performance of Green Motor Ltd. With sales dropping due to competition and the reduction is old prices minimizing fixed expenses is critical towards the business managing its expenses. Thus it is recommended that proposal two be given priority as this proposal helps the businesses limit overhead fixed costs. The proposal also increases the price of the finished product due to the commissions being offered to the workshops and motor engineers used to sell the product but this is critical towards the businesses limiting expenses. By converting the majority of expenses to variable costs the business can limit overhead costs incurred on a monthly basis thus allowing the businesses to manage its expenses even during times of crisis. It also encourages the workshops, engineers and agents to sell more of the brands products so as to secure more commissions thus helping boost the businesses overall sales. Proposal 2 is there for the recommended choice for Green Motor Ltd to adopt as it will help limit the expenses incurred by the businesses
Conclusion
Performance management required for a business to evaluate their previous and current performance history so as to make a modification to their future targets. This is a critical requirement for every business so as to retain its competitive edge which would allow the business map its history and determines important areas which may require improvement. It also helps encourage contribution of new ideas which is critical towards the business securing new and innovative approaches which can be used to improve the business’s performance. The same has been applied by Green Motor Ltd which experiences a major fluctuation in its sales volume and profits thus allowing the business analysis important strategies it can adapt to improve its performance, sales, and market position.
References:
Bacal, R., 2012. Performance Management 2/E. 2nd ed. McGraw Hill Professional.
Cafferky, M., 2010. Breakeven Analysis: The Definitive Guide to Cost-Volume-Profit Analysis. New York: Business Expert Press.
Khan, M.Y. & Jain, P.K., 2013. Management Accounting : Text, Problems and Cases. Tata McGraw-Hill Education.
Media, B.L., 2017. ACCA F5 Performance Management. Singapore: BPP Learning Media.
SANT, T., 2012. Persuasive Business Proposals: Writing to Win More Customers, Clients, and Contracts. 3rd ed. AMACOM Div American Mgmt Assn.
Scarlett, R., 2005. Management Accounting-Performance Evaluation. Oxford: Elsevier.
Weygandt, J.J., Kimmel, P.D. & Kieso, D.E., 2009. Managerial Accounting: Tools for Business Decision Making. John Wiley & Sons.
Wylie, M., 2010. Wise Investing with a Margin of Safety: Investing at the Peak of Pessimism. BPI Mentors.
Zaharuddin, H., 2009. Business Plan Analysis for Mini Market. Diskon.
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