Question

In: Operations Management

Menen Quality Manufacturers has recently hired a new manager called Mr Freddy who is in charge...

Menen Quality Manufacturers has recently hired a new manager called Mr Freddy who is in charge of both production and sales of products. You had a chance to meet Mr Freddy and discussed cost-volume-profit analysis. During the discussion, Mr Freddy told you that his focus for the coming five years is to put some effort in order to achieve breakeven point so that the company achieves its objectives. He said nothing is needed beyond that and asked you to express your opinion on his position. Do you agree with his plan? Briefly explain why or why not.

Solutions

Expert Solution

The Break-even point is the point where total expenses equal to the total revenue. Let us understand this by the given graph.

The following interpretations are drawn from the above graph.

  • A fixed cost of 2200(approx) has incurred for the company even if the sales volume is zero.
  • Variable cost starts as the sales volume increase from zero to 5000.
  • Therefore a total cost line comes into the picture which is the sum of variable cost and the fixed cost.
  • A point of time comes when total sales(Revenue generated) considers the total cost.
  • This is the point when no profit no loss situation arises for the company . This is called BEP(Break-even point).
  • Profit starts after the break-even point only. Below the BEP the company suffers the loss.

Conclusion

The focus of Mr teddy only on BEP and nothing is a need beyond that is not a correct concept. Because after achieving the BEP the company starts earning. The company suffers loss below BEP .During 5 years if Mr Teddy achieve the BEP means that he has covered up the losses ,now whatever will he achieve beyond BEP will be a profit for the company.


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