Plan volumes,
profit and market penetration strategies.
You get financial
breakeven calculations for various fixed costs, variable costs,
sales targets and profit targets.
Variable costs are those which fluctuate directly in proportion
to volume of sales or production. In other words if sales goes up
so does purchases as purchases will vary with sales.
The use of the variable cost method in calculating breakeven
point, is the most correct method for all organisations. However,
it is not always the most convenient method. Therefore you can
also use two other methods in the same way, namely cost of sales
and landed cost. If you use landed cost and mark-up rate, you
assume that administrative and selling expenses in the trade
account and all other expenses in the profit and loss account are
fixed costs.
If you use cost of sales and gross profit rate you also assume
that all expenses in the profit and loss account are fixed. Fixed
cost can usually accommodate increases in volume up to a certain
limit. If you want to go beyond that limit, additional capital
expenditure may be required, which in turn will increase total
fixed cost.
Breakeven = Fixed cost / contribution rate
The breakeven point is where turnover just covers variable cost
as well as fixed cost without making any profit. The calculations
are based on the assumption that the profit margin remains
unchanged.
Provision has been made for a read off matrix which calculates
required sales volumes for various required profit margins and a
read off matrix for calculation of required sales volumes for
various levels of fixed and variable costs to break even.
You should also order the presentations module "Planning a new Business", where the theory of breakeven analysis is covered in detail, complete with examples of various price strategies
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