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Transcript

Preparation Task (10 minutes)

Research Task (30 minutes)

Analysis Task (30 minutes)

Create Task (20 minutes)

Hear from a professional in this role to see how they might approach this task.The following pages are a detailed model answer for the work simulation on Break-Even Analysis, geared towards a student interested in becoming a Accountant.

Document and Present (15 minutes)

Reflection Task (10 minutes)

Expected Outcome

Model Answer

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Objective: Review the key concepts of Break-Even Analysis.Task:Step one: research and understand key concepts. To begin, I reviewed the core concepts related to Break-Even Analysis, including the definitions and roles of fixed costs, variable costs, contribution margin, and the break-even point. I also listed the steps required to conduct a Break-Even Analysis:Identify Fixed Costs: Costs that do not change with production levels, such as rent, salaries, and insurance.Identify Variable Costs: Costs that vary directly with production, such as materials and direct labour costs.Determine Selling Price per Unit: The price at which each unit of the product is sold.Calculate the Contribution Margin: The difference between the sales price per unit and the variable cost per unit.

BEP (units) =

Fixed Costs

Contribution Margin per Unit

Calculate the Break-Even Point: The formula used is:

  • Conduct Scenario Analysis: Modify variables to see how changes in fixed costs, variable costs, and sales price affect the break-even point.
  • Generate a Report: Summarise findings and make recommendations based on the analysis.
Importance:I recognised that Break-Even Analysis is crucial for determining the minimum sales volume a business must achieve to avoid losses. It is also essential for decision-making regarding pricing, cost control, and profit planning.

Preparation task (10 minutes):

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Research task (30 minutes):

Gathering financial data is essential to assess a business’s financial health. You’ll need to understand how assumptions about selling prices, variable costs and fixed costs might change provide critical insight when advising clients.Objective: Gather the relevant data required for conducting a Break-Even Analysis. Task:

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Step one: access and study the provided sample data for a hypothetical small business that is a client of your organisation. This data includes details on fixed costs, variable costs and selling price per unit. Step two: answer the below questions.1. Why might the selling price assumption change?

  • New product to market - no data to validate assumption
  • Customers like the product but not willing to pay the price - do not see it as value for money
2. Why might the variable costs assumption change?
  • Change in suppliers
  • Better/worse production efficiency than expected
3. Why might the fixed costs assumption change?
  • Increased investment assumptions - e.g. rent
  • Misclassified fixed and variable costs

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Step two

Analysis task (40 minutes):

Objective: Calculate the break-even point and analyse its implications for the business.

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Create task (25 minutes):

Objective: Develop a financial report summarising the break-even analysis and providing recommendations.Task:

Step one: based on the analysis, create a concise report.Model Financial Report

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Financial Report: Break-Even Analysis for The Manufacturing Company.IntroductionThe Manufacturing Company is considering adjustments to its pricing strategy and cost structure to optimise profitability. This report summarises the results of a Break-Even Analysis (BEP) and evaluates the impact of changing the selling price, variable costs, and fixed costs. Using various scenarios, we assess the business’s capacity to cover costs and achieve profitability.

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Break-Even Calculations: Base ScenarioIn the current model, the selling price per unit is £1,000, variable costs are £875 per unit, and fixed costs total £150,000. The Break-Even Point (BEP) is calculated as:

  • BEP (Units): 1,200 units
  • BEP (Revenue): £1,200,000
Therefore, The Manufacturing Company needs to sell 250 units or generate £25,000 in sales to cover its fixed and variable costs.

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Scenario Analysis1. Selling Price Adjustments:

  • +5% Increase: New price = £1,050 → BEP: 857 units (Revenue: £900,000)
  • -5% Decrease: New price = £950 → BEP: 2,000 units (Revenue: £1,900,000)
2. Variable Costs Adjustments:
  • +15% Increase: New cost = £1,006.25 → BEP: infeasible. The Manufacturing Company would incur losses and cannot break even in this scenario.
  • -15% Decrease: New cost = £743.75 → BEP: 585 units (Revenue: £585,000)
3. Fixed Costs Adjustments:+10% Increase: New fixed cost = £165,000 → BEP: 1,320 units (Revenue: £1,320,000)-10% Decrease: New fixed cost = £135,000 → BEP: 1,080 units (Revenue: £1,080,000)NB: The units and revenue reported are rounded to the nearest whole unit or £1000.

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Visual SummaryGraphs and charts illustrating the break-even analysis and impact of various scenarios:Table 1: Break-Even Analysis Values (Base Value & Adjusted Scenarios)

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Chart 1: Break-Even Units & Break-Even Revenue

Click to enlarge

Click to enlarge

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Recommendations1. Increase Selling PriceA 5% price increase (to £1,050) reduces the break-even point to 857 units.Action: Consider raising prices moderately to improve profitability while maintaining demand.2. Reduce Variable CostsA 15% reduction in variable costs (to £743.75) reduces the break-even point to 585 units.Action: Focus on lowering production costs through supplier negotiations or efficiency improvements.3. Limit Fixed Cost IncreasesA 10% increase in fixed costs raises the break-even point to 1,080 units.Action: Avoid significant fixed-cost increases unless offset by higher sales or lower variable costs.4. Avoid Price DecreasesA 5% price drop (to £950) raises the break-even point to 2,000 units.Action: Avoid lowering prices to prevent erosion of profit margins and higher sales targets.5. Optimise Cost ManagementReducing both fixed and variable costs has a strong positive impact on profitability.Action: Regularly review costs and implement efficiency measures to ensure sustained profitability.

ConclusionThe break-even analysis reveals that increasing the selling price and reducing variable costs are the most effective strategies for The Manufacturing Company to improve profitability. The company should avoid price decreases and increases in fixed costs to maintain a healthy financial position. Strategic pricing and cost management will allow the company to enhance its competitiveness and achieve sustainable growth.

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Document and Present (15 minutes):

Objective: Communicate the findings and recommendations effectively.Step one: compile your financial report and prepare a brief PPT presentation summarising the key findings.

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View example presentation

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Presentation

Reflection task (10 minutes):

Objective: Reflect on the entire process. Task:

Step one: answer the given questions.

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  • How has this experience contributed to your understanding of break-even analysis and accounting?
This experience enhanced my understanding of how small cost or pricing changes impact profitability and highlighted the importance of accurate forecasting in financial decision-making.
  • What were the most significant challenges you faced throughout this task? How did you address them, and what did you learn from these challenges?
The main challenge was predicting the impact of simultaneous cost and pricing changes. I used sensitivity analysis to address this, learning the importance of identifying key variables that influence profitability.
  • Reflecting on the entire process, what improvements would you suggest for future analyses? How could the process be more efficient or effective?
Future analyses could benefit from advanced modeling techniques like scenario analysis and automation tools to handle complex scenarios more efficiently and improve accuracy.

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By the end of this activity, I successfully conducted a Break-Even Analysis for a hypothetical business scenario, identified how changes in costs and pricing affect the break-even point, and created a professional report summarising the findings. This hands-on experience enhanced my understanding of Break-Even Analysis, honed my data analysis skills, and improved my ability to make informed business recommendations. These skills are directly applicable to real-world accounting tasks, particularly in financial planning and decision-making.

Expected Outcome

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Step two: carry out three different scenarios.I then carried out three different scenarios, changing the selling price, variable costs and fixed costs to observe their impact on the BEP:

  • When increasing the selling price by +5% I calculated that the company needs to sell 857 units or generate £900,000 in revenue to break even. When decreasing the selling price by -5% I calculated that the company needs to sell 2,000 units or generate £1,900,000 in revenue to break even.
  • When increasing the variable costs by +15%, I calculated that the contribution margin was negative. This means the company would incur a loss on each unit sold, and therefore, it cannot reach a break-even point. When decreasing variable costs by -15% I calculated that the company needs to sell 585 units or generate £585,000 in revenue to break even.
  • When increasing the total fixed costs by +10% I calculated that the company needs to sell 1,320 units or generate £1,320,000 in revenue to break even. When decreasing the total fixed costs by -10% I calculated that the company needs to sell 1,080 units or generate £1,080,000 in revenue to break even.

Step five: analyse the combined impact of adjusting the three elements (Selling price, Variable cost, Fixed cost) on the units to achieve break-even.Finally, I considered the combined impact of adjusting the three elements (Selling price, Variable cost, Fixed cost) on the units to achieve break-even. I learned that the combined impact of adjusting selling price, variable costs, and fixed costs shows that any significant change in these elements can drastically shift the number of units needed to break even. By strategically managing these factors, businesses can lower their break-even point and increase profitability.

Step one: calculate the break-even point using spreadsheet software. To calculate the break-even point in terms of units and revenue using the following formulae: And the following data from the provided spreadsheet: Selling Price per Unit: £1,000 Variable Cost per Unit: £875 Fixed Costs: £150,000 I calculated that the company needs to sell 1,200 units or generate £1,200,000 in revenue to break even.

BEP (units) =

Fixed Costs

Selling Price - Variable Costs per unit

BEP (revenue) = BEP (units) x Selling Price

Step three: consider various scenarios by adjusting key variables to observe how changing multiple factors influence the break-even point.I then considered the combined impact of adjusting the selling price, variable costs, and fixed costs simultaneously.

  • When increasing the selling price by +5%, increasing variable costs by +15%, and increasing fixed costs by +10%, I calculated that the company needs to sell 1,636 units or generate £1,717,800 in revenue to break even.
  • When decreasing the selling price by -5%, decreasing variable costs by -15%, and decreasing fixed costs by -10%, I calculated that the company needs to sell 552 units or generate £524,400 in revenue to break even.
  • When increasing the selling price by +5%, decreasing variable costs by -15%, and decreasing fixed costs by +10%, I calculated that the company needs to sell 501 units or generate £526,050 in revenue to break even.

Step four: detail what implications these changes have on selling price, variable cost and fixed cost.From the break-even analyses I conducted, I observed the following implications:

  • Selling Price: An increase in the selling price reduces the number of units required to break even, as each unit contributes more to cover the fixed costs. However, a decrease in selling price means more units need to be sold to reach the BEP.
  • Variable Costs: Higher variable costs increase the BEP, as less profit is made per unit. Reducing variable costs decreases the BEP, allowing the business to break even with fewer units.
  • Fixed Costs: Higher fixed costs increase the BEP, requiring more units to be sold to cover the additional overhead. Reducing fixed costs has the opposite effect, lowering the BEP.