Break Even Analysis Managers Use Tools Like The Break Even
Break Even Analysismanagers Use Tools Like The Break Even Analysis In
Break Even Analysis Managers use tools like the Break-Even Analysis in both the planning and controlling functions of Management. In this assignment, you'll practice using the Break-Even formula to help Ryan determine when his business will begin to turn a profit. Instructions: Using the information from the Learning Module 2, calculate the break-even point in each of the scenarios. Provide a response to the questions in the conclusion. Be sure to use either Word or Excel and to show your work.
Scenario 1: After receiving bad service at the local car wash, Ryan has decided to start VDB Detailing! One of his first decisions when planning his business is to calculate the number of vehicles he will need to detail before breaking even. His uncle has offered to let him use a small section of his shop for only $300 per month. Ryan is going to pay his friend, Gabe, $10/hour to help him. He has estimated his additional expenses and other details to be the following: Insurance $200/month; His share of monthly utilities $95; Wax $2.00; Towels, soap, and other supplies $3.50/vehicle; Leasing of equipment $100/month; Marketing $105/month. He estimates that it will take him 4 hours to detail a vehicle with help from his friend (Hint: how much is this total per car?). He plans to charge $120 per vehicle. Question 1: How many vehicles does Ryan need to detail each month to break even?
Scenario 2: Ryan is now considering leaving his full-time job to grow his business but does not want to lose his salary. Question 2: If he decides to pay himself $2000 per month, how many cars does he have to detail in a month now to break even? Assume all other figures remain constant from scenario 1.
Conclusion: Are these numbers attainable? Please explain. List two suggestions you could give Ryan that would affect his break-even point in a favorable manner, using the Break-Even Formula to justify them.
Paper For Above instruction
To determine Ryan’s break-even point for his new detailing business, we apply the basic break-even analysis formula:
- Break-even point (units) = Fixed costs / (Unit selling price – Variable costs per unit)
First, we identify all fixed costs and variable costs per vehicle from the given data. Fixed costs include rent, insurance, utilities, leasing, and marketing expenses. Variable costs include supplies, wax, towels/soap, and labor costs per vehicle.
Scenario 1 Calculation
Fixed costs per month:
- Shop rent: $300
- Insurance: $200
- Utilities: $95
- Leasing of equipment: $100
- Marketing: $105
- Labor cost: $10/hour x 4 hours = $40 per vehicle, but since this is variable, it will be considered part of variable costs for each vehicle.
Total fixed costs (excluding variable labor costs):
Fixed costs = $300 + $200 + $95 + $100 + $105 = $800
Variable costs per vehicle:
- Towels, soap, and supplies: $3.50
- Wax: $2.00
- Labor: $40.00
Total variable costs per vehicle: $3.50 + $2.00 + $40.00 = $45.50
Unit selling price: $120
Break-even units:
= Fixed costs / (Selling price – Variable costs)
= $800 / ($120 – $45.50) = $800 / $74.50 ≈ 10.74 vehicles
Therefore, Ryan needs to detail at least 11 vehicles per month to break even.
Scenario 2 Calculation
Now, Ryan wants to pay himself $2000 per month, which is an additional fixed expense. So, total fixed costs increase:
New fixed costs = $800 + $2000 = $2800
Using the same variable costs per vehicle as before ($45.50), the new break-even point becomes:
= $2800 / ($120 – $45.50) = $2800 / $74.50 ≈ 37.58 vehicles
Ryan needs to detail at least 38 vehicles per month to cover his expenses and salary.
Conclusion
Assessing the attainability of these numbers involves considering market demand and operational capacity. Detailing 11 cars monthly in Scenario 1 seems quite feasible for a startup, especially with part-time help. However, detailing 38 cars per month in Scenario 2 represents a significant increase, demanding efficient scheduling and marketing to attract sufficient clients.
Two suggestions to improve the break-even point are:
- Reducing variable costs: Negotiating better rates for supplies or automating parts of the process could lower costs per vehicle, increasing the contribution margin and reducing the number of vehicles needed to break even.
- Increasing the selling price per vehicle: Slightly raising the price, perhaps by offering premium packages, would increase revenue per vehicle, thus lowering the required number to break even.
Mathematically, if variable costs per vehicle decreased from $45.50 to $40, the break-even vehicles in Scenario 1 would decrease to:
= $800 / ($120 – $40) = $800 / $80 = 10 vehicles
Similarly, increasing the charge to $125 per vehicle would reduce the break-even from approximately 11 vehicles to:
= $800 / ($125 – $45.50) ≈ 8.58, rounded up to 9 vehicles.
These strategies demonstrate how affecting fixed and variable costs influences the break-even point positively, making the business more sustainable and profitable in the long run.
References
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- Keown, A. J., Martin, J. D., & Petty, J. W. (2019). Financial Management: Principles and Applications. Pearson.
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- Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2020). Financial Statement Analysis. McGraw-Hill Education.
- Higgins, R. C. (2020). Analysis for Financial Management. McGraw-Hill Education.
- Brigham, E. F., & Ehrhardt, M. C. (2021). Financial Management: Theory & Practice. Cengage Learning.
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