Question

Many new businesses intentionally operate in the red during their inaugural year, offering lower initial pricing while building a strong customer base. Examine the business model, performance, and pricing structure for an existing business that started operations within the last 24 months. Using contribution margin and variable costing, analyze their ability to break even. Will they survive in the long term?

Compose your research in a 2-3 page APA style analysis. Include your references. Include references.

Shouldn't have any plagiarism.

Subject: Management Accounting

Answer 1

Break even point (BEP)

It is very important tools in the hands of the maangement in which firms first calculate its BEP in order to survive in the market. it is the point where there is no profit nor loss suffered by the firm that is every firm first determine its break even to know whether they cover its cost from the revenue generated

The above break even firm earn profit and below the break evn firm suffer loses ,so every company try to make output and sale it , upto breakeven. Under this firm , it only consider variable cost for contribution margin and from the contribution fixed cost is deducted to arrive at profit.

BEP is determined when we devide fixed cost by the profit volume ratio and this ratio is obtained by dividing contribution to net sale . Every company first calculate its BEP.

Variable Cost

It is that cost which remain variable that is varies with the level of output it means as the production increases this cost also increases so we can say that there is always positive relationship between the variable cost and the production.

In the short run firm must obtain its variable cost otherwise it suffer from heavy loses in near future , if the firm not even to collect is variable cost in short period then that firm must stop production.

It is running cost and every firm must recover it in short period as in the long run no cost is variable , all cost are fixed in nature

Contribution margin

It is the differenece between sale of the company and variable cost of the company , is contribution margin is more it is good indicator so every firm try to raise their contribution margin and from the contribution fixed cost is settled in order to arrive at the profit , so for the benefit of firm contribution margin mut be more and thsi margin set the firm for future .

So, it is to be analysis that for to survive in th elong run firm must collect its variable cost in the short period as in the long run all cost are variable and there is no difference made in the long run for variable and fixed and all cost must be recovered but for long run planning is made from the short periods