SESSION 05 BREAKEVEN ANALYSIS (ADDITIONAL) GDM MANAGING FINANCE

Transcription

1 SESSION 05 BREAKEVEN ANALYSIS (ADDITIONAL) GDM MANAGING FINANCE

2 Jessie started a business of making and selling customised wedding cake pieces, in 2014, called Glamour.

3 Scene 01 Date 01 st January 2014 Today she launched her business with a grand opening ceremony. Since she is still new to business, she wants to survive in the market, without making losses. She wants to ensure that she covers the costs that she incurs. She is satisfied even if she is unable to make any profits, as long as she does not make any losses (by being unable to cover the costs incurred). Hence, she wants to know, how many units she needs to sell / the sales revenue she should generate in order for her to not to make any losses and survive. This is called the BREAKEVEN POINT (in units and in value)

4 Scene 02 Date 01 st July 2014 Today she completes 6 months into business. Now she is tired of losing sleep over the scare of making losses, since all she aimed at was breaking even. She wants to be safe from losses and survive in business. Hence, she wants to know the current level of sales of her company, in order for her to see how above her current sales level is, from the breakeven level. She WANTED her business to operate with at least a small gap between her current sales level and the breakeven level, so she can have a peace of mind. This is called the MARGIN OF SAFETY (in units, in value, & as a % of budgeted sales units)

5 Scene 03 Date 01 st January 2016 Today she completes 2 years into business. Now she is tired of having small gaps between her sales level and the breakeven level. Any slight drops in the sales level has made her suffer losses, as she was having a small margin of safety. Further, having a small margin of safety meant that even though she did not make losses and she made profits, the profits she made were very small. Hence, she now wants to target a profit that is in her mind and achieve it. For this, she wants to know, how many units she should sell and how much of a sales revenue she should generate, in order to achieve her targeted profit. This is called the TARGET PROFIT calculation (in units and in value)

6 Scene 04 Date 31 st December 2016 Today, one of her friends - Jason, who is a management accountant by profession, visits her and sees her successful business. Jessie starts talking about the financial side of things with Jason, and talks about how she first merely met breakeven point, then went for a small margin of safety, and now she is at a point of going for a target profit. Listening to her story, Jason questioned Jessie whether, despite of only targeting breakeven, MOS and target profit, whether she has ever looked back to see whether she actually achieved the targeted breakeven, MOS, or the targeted profit accordingly. Jason further explained that, irrespective of whatever she targets for, she should always turn back and look what is the actual profit or loss that she achieved, so that she knows whether she has really achieved what she targeted for (breakeven, or MOS, or the target profit). This is called the PROFIT/LOSS calculation

7 Let us now apply this to a calculation and see. Refer In-class Question 01. Refer each scene in the Breakeven Story about Jessie s business Glamour, while doing the calculations.

8 Ground Work

9 Scene 01 part (a) BREAKEVEN POINT (in units and in value)

10 Scene 02 part (b) MARGIN OF SAFETY (in units, in value, & as a % of budgeted sales units)

11 Scene 03 part (c) TARGET PROFIT calculation

12 Scene 04 part (d) PROFIT/LOSS calculation

13 Visual Presentation part (e)

14 Visual Presentation part (e) - continued