winch ester tempered steel

8/3/2019 Winch Ester Tempered Steel

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Southampton Solent University

Business Management Year 2 - BABM/B1

Richard Sayer

Winchester Tempered Steel

Financial Decisions (ACC299)

Tutor: Pete Allen


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Contents

SECTION 1. Introduction 3

SECTION 2. Break-even 3

SECTION 3. Usefulness ofBreak-even 4

SECTION 4. Flexible budget and comments 5

SECTION 5. Bibliography 7


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SECTION 1 Introduction

The following report will look the break-even and flexible budget of Winchester Tempered

Steel. Also discussing the results of each of the outcomes and looking into the usefulness of

break-even budgets.

SECTION 2 Break-even

The following spreadsheet (figure 1) and chart (figure 2), describe the break-even points

(BEP) for each of the stepped fixed costs. Using the following formula we are able to

establish the three BEPs for each stepped fixed costs:

BEP = Fixed costs

(Sales revenue per unit - Variable costs per unit)

Using the formula it can be established at the first stepped cost of 10,000 units is the first

BEP, 12,885 for the second stepped cost (between 10,001 15,000 units), and 16731

(between 15001 20,000 units) for the final stepped cost.

Quantity Fixed CostsVariableCosts Total Cost Revenue Profit

10,000 52,000 110,000 162,000 162,000 0

11,000 67,000 121,000 188,000 178,200 (9,800)

12,000 67,000 132,000 199,000 194,400 (4,600)

13,000 67,000 143,000 210,000 210,600 600

14,000 67,000 154,000 221,000 226,800 5,800

15,000 67,000 165,000 232,000 243,000 11,000

16,000 87,000 176,000 263,000 259,200 (3,800)

17,000 87,000 187,000 274,000 275,400 1,400

18,000 87,000 198,000 285,000 291,600 6,60019,000 87,000 209,000 296,000 307,800 11,800

20,000 87,000 220,000 307,000 324,000 17,000

Figure 1. Break-even spreadsheet


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Figure 2. Break-even chart

The points of profit maximization for each step can be seen most clearly in the spreadsheet, at

each point just before the next step of increased fixed costs, at 10,000 units (0, which is only

break-even), 15,000 units (11,000) and 20,000 units (17,000). The reason for this is at the

point of the next unit the fixed cost increases another step.

SECTION 3 Usefulness of break-even

In any business, the manager has to make decisions regardless of the products they produce to

maximise equity (Bukisa 2008). Meaning that the products and services they offer can make

a profit at the right production level whilst also identifying loss making products and

introduce new products into the market if profitable. As with any management decision there

must be a cost control system, which will help minimise overhead costs and direct costs of

producing services and goods (Wood and Sangster 2008).

Break-even analysis is one of the simplest methods for any business decision, especially

where the business entity produces very limited number of products. Wood and Sangster

write that costs can be classified accurately as either fixed or variable and changes in activity

are the only factors that affect costs. Fixed costs are costs over a period of time that remains

constant regardless of the volume of production to a level. Variable costs are costs that vary

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

Cost

()

Quantity (m)

Break-even Chart

Fixed Costs

Revenue

Total Cost


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with the level of business activity or level of production. There is no ending finished goods

inventory, all units produced are considered sold. When a company sells more than one type

of product, the sales mix (the ratio of each product to total sales) will remain constant. Cost

volume profit analysis (CVP) assumes that there is a constant sales price, a constant variable

cost per unit, a constant total fixed cost and a constant sales mix (Wood and Sangster 2008).

For some products the break-even point will be at higher levels and for other products the

break-even point will be at a lower level of production. The profit margin of safety that can

be earned after the break-even point will also vary (McLaney and Atrill 2008). This is why it

is important to maximise profit earned from each product and to reduce variable costs, reduce

overheads and increase sales by cost effective promotions, advertising and improving the

quality of the products against its competitors.

A business which fails to meet its BEP must take steps to solve the problem. There needs to

be an increase in revenue, a reduction of costs or a mixture of both. This often happens when

a business fails to check the most basic CVP analysis.

In conclusion, break-even analysis enables managers to make effective decisions based on

cost information and other limiting factors. Whilst having control systems that can help

reduce waste and improve productivity of labour force and improving production methods

and operations.

SECTION 4 Flexible budget and comments

A flexible budget is a budget which adjusts or flexes for changes in the volume of activity.

The flexible budget is more accurate and useful then a static budget, which stays at one

amount regardless of volume (Wood and Sangster 2008).

The flexible budget report is used by management to identify the sales or expenses amounts

which differ so management can find out why the variances happened. By understanding the

variances, management can decide whether any action needs to be taken. Favourable

variances are usually positive amounts, and unfavourable variances are usually negative

amounts (Cox 2004).


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Units 10000 12000 14000 16000 18000 20000

Sales Revenue 162,000 194,400 226,800 259,200 291,600 324,000

Raw Materials 29,000 34,800 40,600 46,400 52,200 58,000

Fix. Materials 17,000 17,000 17,000 17,000 17,000 17,000

Labour 45,000 54,000 63,000 72,000 81,000 90,000

Var. Overheads 36,000 43,200 50,400 57,600 64,800 72,000

Fix. Overheads 35,000 50,000 50,000 70,000 70,000 70,000

0 (4,600) 5,800 (3,800) 6,600 17,000

Figure 3. Flexible budget

In figure 3 it looks deeper into the costs at every 2,000 metre interval of the production. It is

clear to see there is linear increases with sales revenue, raw materials, labour and variable

overheads. Whilst a steady fixed cost for fixed materials and stepped fixed costs depending

on output quantity. It is clear to see that the longer the run the greater increase in revenue for

the business, which will help achieve long-term goals.

Perhaps producing 20,000 metres every7 run will help reduce the overall costs to the business

whist the business receives its greatest revenue, but this will in turn increase holding costs of

the steel.

The important thing to remember in preparing a flexible budget is that if an amount, cost or

revenue, was variable when the original budget was prepared, that amount is still variable and

will need to be recalculated when preparing a flexible budget (CliffsNotes 2011). However,

the cost was identified as a fixed cost, no changes are made in the budgeted amount when the

flexible budget is prepared. Differences may occur in fixed expenses, but they are not related

to changes in activity within the relevant range (Gowthorpe 2002).


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SECTION 5 Bibliography

Bukisa, 2008. Break-even Analysis for business decision making[online]. Available:http://www.bukisa.com/articles/20541_break-even-analysis-for-business-decision-making [accessed

2nd February 2011]

CliffsNotes, 2011. Flexible Budges [online]. Available:

http://www.cliffsnotes.com/study_guide/Flexible-Budgets.topicArticleId-21248,articleId-21241.html

[accessed 2nd February 2011]

Cox, D, 2004.Business Accounts. 3rd Ed. Worcester: Osborne Books

Gowthorpe, C, 2002.Business Accounting and Finance. 2nd Ed. London: Thomson Learning

McLaney, E., P Atrill, 2008.Accounting An Introduction. 4th Ed. Harlow: Pearson Education

Wood, F., A Sangster, 2008.Business Accounting 1. 11th Ed. Harlow: Pearson Education

Wood, F., A Sangster, 2008.Business Accounting 2. 10th Ed. Harlow: Pearson Education

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