Managers Use Tools Like Break-Even Analysis In Both The

Managers Use Tools Like The Break Even Analysis In Both The Planning

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. His first decision is to calculate how many vehicles he needs to detail before breaking even. His uncle has offered to let him use a small section of his shop for $300 per month. Ryan will pay his friend Gabe $10/hour to help him. His estimated monthly expenses include insurance ($200), utilities ($95), wax ($2.00 per vehicle), towels, soap, and other supplies ($3.50 per vehicle), leasing of equipment ($100), and marketing ($105). Ryan estimates it takes 4 hours to detail a vehicle with Gabe’s help. 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 considers 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 in addition to his other expenses, how many cars does he need to detail monthly 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 favorably, using the Break-Even Formula to justify them.

Paper For Above instruction

To determine Ryan's break-even point in both scenarios, understanding the core components of the break-even analysis is essential. The break-even point (BEP) is the level of sales at which total revenues equal total expenses, resulting in zero profit. It can be calculated with the formula:

Break-Even Units = Fixed Costs / (Price per vehicle - Variable Cost per vehicle)

The fixed costs in Ryan's business include the monthly shop rent, insurance, utilities, leasing, and marketing expenses. The variable costs include wax, supplies, and wages, which depend on the number of vehicles detailed.

Scenario 1 Calculation

Fixed Costs:

  • Shop Rent: $300
  • Insurance: $200
  • Utilities: $95
  • Leasing of Equipment: $100
  • Marketing: $105

Total Fixed Costs = $300 + $200 + $95 + $100 + $105 = $800

Variable Costs per vehicle:

  • Wax: $2.00
  • Supplies: $3.50
  • Labor: 4 hours at $10/hour = $40

Total Variable Cost per vehicle = $2 + $3.50 + $40 = $45.50

Price per vehicle = $120

Applying the formula:

Break-Even Vehicles = $800 / ($120 - $45.50) = $800 / $74.50 ≈ 10.74

Therefore, Ryan needs to detail at least 11 vehicles per month to break even.

Scenario 2 Calculation

Additional fixed expense: Ryan now aims to pay himself $2000 monthly salary in addition to existing costs.

Total Fixed Costs = Previous Fixed Costs + Ryan’s salary = $800 + $2000 = $2800

Using the same variable costs and price per vehicle as above:

Break-Even Vehicles = $2800 / ($120 - $45.50) = $2800 / $74.50 ≈ 37.59

Ryan needs to detail at least 38 vehicles each month to cover all expenses and salary.

Feasibility and Recommendations

Attainability of these numbers depends on market demand and Ryan's capacity. Detailing 11 vehicles monthly in Scenario 1 appears manageable for a small startup, especially considering potential growth. However, detailing 38 vehicles monthly in Scenario 2 might be challenging initially unless Ryan aggressively expands his marketing or operational efficiency.

To improve his breakeven point favorably, Ryan could consider the following strategies:

  • Reduce Fixed Costs: Negotiating lower rent or leasing costs can substantially decrease fixed expenses, thereby lowering the BEP. For example, if Ryan can negotiate a lower shop rent or find a more affordable workspace, this directly reduces monthly fixed costs, increasing the number of vehicles needed to break even.
  • Increase Price or Improve Efficiency: Raising the price per vehicle slightly or cutting down on time per detailing session can also impact the BEP positively. For example, increasing the price to $125 per vehicle with the same costs reduces the required units to break even. Alternatively, improving efficiency to lower labor hours per vehicle from 4 to 3.5 hours reduces variable costs, thereby decreasing the BEP.

Overall, current figures seem attainable in Scenario 1 with proper marketing and operational management. However, the higher vehicle volume in Scenario 2 will require strategic planning, customer acquisition, and operational scaling. Applying the break-even formula helped Ryan identify specific targets for growth and areas to optimize for profitability.

References

  • Higgins, R. C. (2018). Analysis for Financial Management. McGraw-Hill Education.
  • Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting. McGraw-Hill Education.
  • Drury, C. (2018). Management and Cost Accounting. Cengage Learning.
  • Horngren, C. T., Datar, S. M., & Rajan, M. (2015). Cost Accounting: A Managerial Emphasis. Pearson.
  • Blocher, E., Stout, D. E., Juras, P. E., & Cokins, G. (2019). Cost Management: A Strategic Emphasis. McGraw-Hill Education.
  • Brigham, E. F., & Ehrhardt, M. C. (2019). Financial Management: Theory & Practice. Cengage Learning.
  • Kaplan, R. S., & Cooper, R. (2017). Cost & Effect: Using Integrated Cost Systems to Drive Profitability and Strategic Planning. Harvard Business Review Press.
  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Financial & Managerial Accounting. Wiley.
  • Shim, J. K., & Siegel, J. G. (2017). Financial Management. Barron’s Educational Series.
  • Foster, G., & Gupta, S. (2017). Cost Accounting and Operating Decisions. Pearson Education.

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