H BUSINESS ANALYSIS
H BUSINESS ANALYSIS MGS 3100
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This 4 page Class Notes was uploaded by Ms. Aaliyah Crist on Monday September 21, 2015. The Class Notes belongs to MGS 3100 at Georgia State University taught by Staff in Fall. Since its upload, it has received 25 views. For similar materials see /class/209867/mgs-3100-georgia-state-university in Managerial studies at Georgia State University.
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Date Created: 09/21/15
MGS3100 Chapter 2 Slides 2d BreakEven and CrossOver Analyses The Generalized Pro t Model A decisionmaker will breakeven when pro t is zero We will develop the formula for the breakeven point by setting the generalized pro t model equal to zero and then solve for the quantity Q For simplicity we will assume that the quantity produced is equal to the quantity sold This assumption will be relaxed in the chapter on decision theory Pro t TE Revenue R Cost C Revenue R Selling price per unit SP x Quantity sold Q5 Cost C Variable cost per unit VC x Quantity produced Qp Fixed Cost FC For now Let Qp QS Therefore TE RC n SPQVCQ PC TE SPQ VCQ FC TE SPVCQ FC If Contribution Margin CM SPVC then TE CMQ FC and Q FC 71 C From this formula we can determine the quantity to produce and sell that will yield a pro t of TE dollars For example If xed cost is 150000 per year selling price per unit SP is 400 and variable cost per unit VC is 250 what quantity Q will produce a pro t of 300000 CMSPVC400250150 Q FC TECM 150000 300000150 450000150 3000 units Breakeven Point By setting TE 0 and solving for Q we nd the breakeven quantity as follows 0 CMQBE FC FC CMQBE FCCM QBE QBE FCC For example if FC 150000 V0 250 CM 150 SP400 QBE 150000 150 1000 units Pictorially BreakEven Point 150000 Cross Over Point Indifference Point The crossover or indifference point is found when we are indifferent between two plans In other words this is the value of Q when pro t is the same for each of two plans To nd the crossover point for Plan A and B TEA CMAQA FCA 7TB CMBQB FCB lt Set TEA equal to 753 and solve for value of Q Let s call this crossover point between Plans A and B Q AtoB or in general Qco Therefore setting the two equations equal to each other and solving for Q IIQAmB FCA FCBCMA CMBquot To illustrate the crossover point let s look at three strategies or plans Plan A Plan B Plan C FC 150000 450000 2850000 VC 250 150 100 SP 400 150 400 250 400 300 Breakeven Points for each plan are Plan A Plan B Plan C QBE I 150000400250 450000400 150 2850000400 100 1000 units 1800 units 9500 units And by definition the pro t at each breakeven point is zero Crossover Points A to B B to C Qco 150000450000150250 4500002850000250300 3000 units 48 000 units And since 7 CMQ FC the pro t at each crossover point is TEA CMAQ FCA 1503000 150000 300000 or 753 2503000 450000 300000 m3 CMBQ FCB 25048000 450000 11550 000 or arc 30048000 2850000 11550000 To interpret the answers we are indifferent between Plan A and Plan B when Q 3000 units and either Plan A or B would yield a pro t of 300000 when Q 3000 units We are also indifferen between Plan B and Plan C when Q 48000 units and either Plan B or C would yield a pro t of 11550000 when Q 48000 units Pictorially KEY A B NOT TO SCALE Crossover Points 3000 48000 Below 1000 units none of the strategies would breakeven And remember that the generalized pro t model above can be used to nd the amount of pro t for a plan at any value of Q Therefore depending on the number of units produced and sold Q the best plan to pursue would be as follows Units Q Decision 0999 Don t produce 10002999 Plan A 3000 Plan A or Plan B 300147999 Plan B 48000 Plan B or Plan C gt48000 Plan C