# Application of financial and break-even analysis to a scenario

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Financial Plan and Break-Even Analysis

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Break-Even Analysis

 Break Down Computation for 6 Months Ended June 2013 In Dollars Units Per Unit In Percentage Sales (invoiced) \$562,500.00 8500 \$66.18* 100% Variable Cost \$84,170.00 8500 \$9.90 14.96% Contribution Margin \$478,330.00 8500 \$56.28 85.04% Fixed Cost \$35,363.00 Net Income \$442,967.00

In computation of the Break-Even Point, there are two outcomes that require analysis. These are the Break-Even Sales in Units or Volume and Break-Even Sales in Dollars. In Figure 1, the amounts listed are derived from Profit and Loss Forecast section of the excel file. All amounts are forecasts from January to June of 2013 including estimated set-up costs.

Figure 1. Break Down Computation for 6 Months Ended June

*Sales Price per Unit= Original Price x (100% + Mark-Up Percentage)

= \$ 57.55 x 1.15

= \$ 66.18

 Fixed Costs Salaries and wages \$18,000.00 Repairs and maintenance \$240.00 Advertising \$1,200.00 Marketing survey \$300.00 Rent \$1,800.00 Design and testing \$400.00 Equipment hire/lease \$5,000.00 Patents \$150.00 Depreciation \$100.00 Copyright registration \$120.00 Electricity and gas \$1,000.00 Recruitment and selection \$200.00 Insurance \$1,200.00 Water bills \$200.00 Legal fees \$300.00 Construction \$3,000.00 Transport/courier costs \$540.00 Office set up \$1,000.00 Postage, telephone and fax \$190.00 Distribution \$264.00 Stationery \$159.00 Total Fixed Cost \$35,363.00

Figure 2. Composition of Total Fixed Costs

The company incurred total fixed costs of \$35,363.00 for its iScent Alarm Clocks from January to June of 2013. Variable cost is \$9.9 per unit which is 14.96% of the sales price per unit. The iScent Alarm Clock has an original price of \$ 57.55. Given the proposed mark-up price of 15%, the new price of iScent Alarm Clock is \$ 66.18 per unit. Hence, the company will sell an iScent Alarm Clock for \$ 57.55 for retailers and wholesalers while \$ 66.18 for every single purchase of customers. Moreover, the mark-up percentage of 15% can cover unanticipated or unforeseen product-related costs that may arise in future. Using data provided in Figure 1, below is the computation of break-even point in units and in dollars.

 Break-Even Point in Units = Total Fixed Cost Sales Price per Unit - Variable Cost Per Unit Break-Even Point in Units = \$35,363.00 \$ 66.18 - \$ 9.9 Break-Even Point in Units = 628.34 units Break-Even Point in Dollars = \$ 41,583.57 (\$628.34 units x \$ 66.18)

Figure 3. Break-Even Point Computation

In Figure 3, the break-even points are 628.34 units and \$41,583.57. It means that the company must sell 628.34 units of iScent Alarm Clock within six months to recover the cost of producing those alarm clocks or to simply break-even. To further explain; if the company produced and sold 628.34 pieces of iScent Alarm Clock, each of these units will cover the marginal or variable costs of \$84,170.00 as well as all associated fixed costs of \$35,363.00. If the company sells 628.34 iScent Alarm Clocks, then it will not experience a loss. Upon selling more than 628.34 units, all fixed costs have been settled, and each unit contributes to earnings by the contribution margin. Hence, if the company sells more than 628.34 units, it will be considered as income for the company. The Break-Even Point in Dollars of \$ 41,583.57 is simply the price of 628.34 units when sold.

 Units Sales Revenue Variable Cost Contribution Margin Fixed Cost Total Cost Net Income 100 6618 990 5628 35,363.00 36,353.00 -29,735.00 200 13236 1980 11256 35,363.00 37,343.00 -24,107.00 300 19854 2970 16884 35,363.00 38,333.00 -18,479.00 400 26472 3960 22512 35,363.00 39,323.00 -12,851.00 500 33090 4950 28140 35,363.00 40,313.00 -7,223.00 600 39708 5940 33768 35,363.00 41,303.00 -1,595.00 628.34 41583.541 6220.566 35363 35,363.00 41,583.57 0.0 700 46326 6930 39396 35,363.00 42,293.00 4,033.00 800 52944 7920 45024 35,363.00 43,283.00 9,661.00 900 59562 8910 50652 35,363.00 44,273.00 15,289.00 1000 66180 9900 56280 35,363.00 45,263.00 20,917.00

Figure 4. Tabulation of Sales Revenue, Variable Cost, Contribution Margin, Fixed Cost, Total Cost and Net Income

Figure 5. Chart Summary of Break-Even Points

Figure 4 illustrates the amounts of Sales Revenue, Variable Cost, Contribution Margin, Fixed Cost, Total Cost and Net Income upon selling units of iScent Alarm Clocks in different levels. In analysis of the table, the company incurs a negative amount or losses when it sells less than the break-even units of 628.34. As shown in Figure 4, the company will incur a loss of \$1,595.00 when it sells 600 units only. On the other hand, anything sold beyond 628.34 units is automatically a profit for the company. In analysis of the break-even amounts, Sales Revenue and Total Cost tallies to \$41,583.60 and Contribution Margin and Fixed Cost tallies to \$35,363. Lastly, there is no income and loss on the break-even units of 628.34. Figure 5 shows the graphical interpretation of the intercepting points of Sales Revenue, Total Cost and Net Income in relation to units sold.

Forecasting Techniques

The company has used three forecasting techniques namely; Profit and Loss Forecast (Figure 6), Cash Flow Projection (Figure 7) and Balance Sheet Forecast.

 Profit and Loss Forecast JANUARY FEBRUARY MARCH APRIL MAY JUNE TOTALS Sales Sales (invoiced) \$69,000.00 \$76,000.00 \$85,000.00 \$99,300.00 \$108,200.00 \$125,000.00 \$562,500.00 Cost of goods sold \$10,300.00 \$12,100.00 \$14,470.00 \$15,800.00 \$15,500.00 \$16,000.00 \$84,170.00 Gross profit \$58,700.00 \$63,900.00 \$70,530.00 \$90,900.00 \$92,700.00 \$109,000.00 \$478,330.00 Expenses Salaries and wages \$1,800.00 \$2,200.00 \$2,500.00 \$3,500.00 \$3,900.00 \$4,100.00 \$18,000.00 Advertising \$200.00 \$200.00 \$200.00 \$200.00 \$200.00 \$200.00 \$1,200.00 Rent \$300.00 \$300.00 \$300.00 \$300.00 \$300.00 \$300.00 \$1,800.00 Equipment hire/lease \$5,000.00 \$5,000.00 Depreciation \$0.00 \$20.00 \$20.00 \$20.00 \$20.00 \$20.00 \$100.00 Electricity and gas \$200.00 \$120.00 \$150.00 \$230.00 \$130.00 \$170.00 \$1,000.00 Insurance \$200.00 \$200.00 \$200.00 \$200.00 \$200.00 \$200.00 \$1,200.00 Legal fees \$50.00 \$50.00 \$50.00 \$50.00 \$50.00 \$50.00 \$300.00 Transport/courier costs \$120.00 \$90.00 \$68.00 \$85.00 \$95.00 \$82.00 \$540.00 Postage, telephone and fax \$30.00 \$31.00 \$23.00 \$28.00 \$48.00 \$30.00 \$190.00 Stationery \$20.00 \$23.00 \$24.00 \$30.00 \$31.00 \$31.00 \$159.00 Repairs and maintenance \$40.00 \$34.00 \$27.00 \$61.00 \$20.00 \$58.00 \$240.00 Marketing survey \$300.00 \$300.00 Design and testing \$400.00 \$400.00 Patents \$150.00 \$150.00 Copyright registration \$120.00 \$120.00 Recruitment and selection \$200.00 \$200.00 Water bills \$44.00 \$28.00 \$21.00 \$34.00 \$43.00 \$30.00 \$200.00 Construction \$3,000.00 \$3,000.00 Office set up \$1,000.00 \$1,000.00 Distribution \$50.00 \$30.00 \$49.00 \$61.00 \$40.00 \$34.00 \$264.00 Total \$13,224.00 \$3,326.00 \$3,632.00 \$4,799.00 \$5,077.00 \$5,305.00 \$35,363.00 Result Net profit \$45,476.00 \$60,574.00 \$66,898.00 \$86,101.00 \$87,623.00 \$103,695.00 \$442,967.00 Gross profit margin 85% 84% 83% 92% 86% 87% 85% Net profit margin 66% 80% 79% 87% 81% 83% 79%

Figure 6. Profit and Loss Forecast

 Cash Flow Projection for iScent January February March April May June Totals Cash Balance - Beginning \$50,000 \$64,521 \$78,585 \$102,676 \$127,915 \$133,955 Cash Inflow Operating revenue Cash receipts from customers \$25,000 \$26,300 \$24,800 \$26,540 \$21,050 \$24,760 \$148,450 Collection of receivables \$2,745 \$3,102 \$3,258 \$3,498 \$3,795 \$4,046 \$20,444 Other operating revenue received \$0 \$0 \$0 \$0 \$0 \$0 \$0 Total Operating Revenue \$27,745 \$29,402 \$28,058 \$30,038 \$24,845 \$28,806 \$168,894 Other Sources of Cash Inflows Proceeds from sale of assets \$0 Funds borrowed \$20,000 \$20,000 Tax refund/rebates \$0 Other sources of cash inflow \$0 Total other cash inflows \$0 \$20,000 \$0 \$0 \$0 \$0 \$20,000 Total monthly cash inflow \$27,745 \$49,402 \$28,058 \$30,038 \$24,845 \$28,806 \$188,894 Cash Outflow Inventory (Stock) Stock purchases \$12,012 \$13,728 \$25,740 Other Cost of Goods \$0 Total Cost of Goods \$0 \$12,012 \$0 \$0 \$13,728 \$0 \$25,740 Fixed Expenses Salaries and wages \$1,800 \$2,200 \$2,500 \$3,500 \$3,900 \$4,100 \$18,000 Advertising \$200 \$200 \$200 \$200 \$200 \$200 \$1,200 Rent \$300 \$300 \$300 \$300 \$300 \$300 \$1,800 Equipment hire/lease \$5,000 \$5,000 Depreciation \$0 \$20 \$20 \$20 \$20 \$20 \$100 Electricity and gas \$200 \$120 \$150 \$230 \$130 \$170 \$1,000 Insurance \$200 \$200 \$200 \$200 \$200 \$200 \$1,200 Legal fees \$50 \$50 \$50 \$50 \$50 \$50 \$300 Transport/courier costs \$120 \$90 \$68 \$85 \$95 \$82 \$540 Postage, telephone and fax \$30 \$31 \$23 \$28 \$48 \$30 \$190 Stationery \$20 \$23 \$24 \$30 \$31 \$31 \$159 Repairs and maintenance \$40 \$34 \$27 \$61 \$20 \$58 \$240 Marketing survey \$300 \$300 Design and testing \$400 \$400 Patents \$150 \$150 Copyright registration \$120 \$120 Recruitment and selection \$200 \$200 Water bills \$44 \$28 \$21 \$34 \$43 \$30 \$200 Construction \$3,000 \$3,000 Office set up \$1,000 \$1,000 Distribution \$50 \$30 \$49 \$61 \$40 \$34 \$264 Total Fixed Expenses \$13,224 \$3,326 \$3,632 \$4,799 \$5,077 \$5,305 \$35,363 Other Expenses Bank Interest \$0 GST \$335 \$435 \$770 Total Other Expenses \$0 \$0 \$335 \$0 \$0 \$435 \$770 Other Cash Outflows Purchase of assets \$20,000 \$20,000 One-off bank fees \$0 Principal Loan repayments \$0 Payments to the owner/s \$0 Investment of surplus funds. \$0 Other cash inflows \$0 Total Other Cash Outflows \$0 \$20,000 \$0 \$0 \$0 \$0 \$20,000 Total Monthly Cash Outflow \$13,224 \$35,338 \$3,967 \$4,799 \$18,805 \$5,740 \$81,873 Difference of Inflow and Outflow \$14,521 \$14,064 \$24,091 \$25,239 \$6,040 \$23,066 \$107,021 Cash balance at the end of each month \$64,521 \$78,585 \$102,676 \$127,915 \$133,955 \$157,021 \$664,673

Figure 7. Cash Flow Projection for iScent

 Balance Sheet Projection for December 31, 2014 Assets Liabilities and Equity Current Assets Current Liabilities Cash in bank \$ 307,751.00 Accounts payable \$ 33,120 Accounts receivable \$61,430.00 Interest payable 6,700 Inventory \$42,100.00 Taxes payable 3,200 Prepaid expenses \$ 400.00 Notes, short-term (due within 12 months) 20,000 Other current assets 1,350 Current part, long-term debt 12,000 Total Current Assets \$413,031 Other current liabilities 1,4