Getting Started: One Useful Technique For Evaluating Alterna
Getting Startedone Useful Technique For Evaluating Alternative Choices
Getting Startedone Useful Technique For Evaluating Alternative Choices
Getting Started One useful technique for evaluating alternative choices is break-even analysis; that is what quantity of goods or services would have to be produced in order to pay for the costs of each alternative. Generally, the choice with the lower breakeven quantity is a less risky and better choice. Upon successful completion of this assignment, you will be able to: Develop research and data analytical skills for use in solving business problems. Instructions Read chapters 1, 2, 3, 4, and 5 in the online textbook from OCLS , Break-Even Analysis: The Definitive Guide to Cost-Volume-Profit Analysis. Review the file title Linear Equations and complete the eight questions at the end of the file.
Be sure to show your work. You may do the work in excel but be sure your answers are clearly highlighted and that the formulas work within the excel document.
Paper For Above instruction
The task at hand involves applying break-even analysis as a strategic decision-making tool to evaluate various business alternatives. This analysis is essential in understanding at which point a business will neither profit nor incur a loss, effectively balancing costs and revenues (Garrison, Noreen, & Brewer, 2018). Through this approach, businesses can minimize risk and make informed choices about resource allocation and operational strategies.
Introduction
Break-even analysis is a pivotal technique in managerial accounting that determines the minimum output quantity required to cover all fixed and variable costs, thereby identifying the 'break-even point' (Higgins, 2012). This method is particularly useful when comparing multiple alternatives, such as product lines or investment options. The primary goal is to select the alternative with the lowest break-even quantity, as this indicates a lower level of sales needed to be profitable, thus reflecting a less risky option.
Understanding the Concept of Break-Even Analysis
At its core, break-even analysis involves the calculation of the break-even point (BEP), typically expressed in units or sales dollars. The fundamental formula to determine the BEP in units is:
\[ \text{BEP (units)} = \frac{\text{Fixed Costs}}{\text{Selling Price per Unit} - \text{Variable Cost per Unit}} \]
This formula requires precise identification of fixed costs, variable costs per unit, and the selling price per unit (Horngren et al., 2014). Once the break-even quantity is known, managers can assess whether alternative strategies or products are financially viable.
Application of Break-Even Analysis to Various Alternatives
When evaluating multiple options—such as different products, processes, or market approaches—break-even analysis provides a quantitative basis for comparison. For each alternative, the fixed costs, variable costs, and sales prices are identified, followed by the calculation of the respective BEPs.
For example, consider two product lines, A and B. Product A has fixed costs of $50,000, a selling price of $20, and variable costs of $12 per unit. Product B has fixed costs of $30,000, a selling price of $25, and variable costs of $15 per unit. Calculating the BEP for both:
- Product A: \( \frac{50,000}{20 - 12} = 6,250 \) units
- Product B: \( \frac{30,000}{25 - 15} = 3,000 \) units
Since Product B has a lower break-even point, it requires fewer sales to reach profitability, indicating it may be a less risky alternative.
Advantages and Limitations
The main advantage of break-even analysis is its simplicity and clarity, helping managers quickly identify the sales volume needed for profitability. It aids in pricing decisions, cost management, and assessing the viability of business initiatives (Drury, 2013). However, it assumes linearity in costs and revenues, ignores market demand constraints, and does not account for changes over time, which may limit its accuracy in dynamic markets.
Conclusion
Break-even analysis is a fundamental technique to assess and compare alternative business strategies based on their cost structures. By focusing on the break-even point, managers can make data-driven, strategic decisions that mitigate risk and improve financial performance. Developing proficiency with this technique enhances overall research and analytical skills vital for effective business problem solving.
References
Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting (16th ed.). McGraw-Hill Education.
Higgins, R. C. (2012). Analysis for Financial Management (10th ed.). McGraw-Hill.
Horngren, C. T., Datar, S. M., Rajan, M. V., & Luke, J. (2014). Cost Accounting: A Managerial Emphasis (15th ed.). Pearson Education.
Drury, C. (2013). Management and Cost Accounting (8th ed.). Cengage Learning.
Blocher, E., Stout, D., Juras, P., & Cokins, G. (2019). Cost Management: A Strategic Emphasis. McGraw-Hill Education.
Kaplan, R. S., & Norton, D. P. (2001). The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment. Harvard Business School Press.
Shim, J. K., & Siegel, J. G. (2012). Budgeting Basics and Beyond. John Wiley & Sons.
Antos, J. (2019). Cost-volume-profit analysis and decision making. Journal of Accounting Education, 39, 29-44.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Financial & Managerial Accounting (10th ed.). Wiley.
Anthony, R. N., & Govindarajan, V. (2014). Management Control Systems. McGraw-Hill Education.