Question

You are working as a graduate within the engineering department of a manufacturing and consulting focused public listed company. You and your team are working on the post-COVID recovery and how best to allocate capital. Your team has $1,000,000 in capital at their disposal. The entire department is going to have a conference call next week and you have been asked to prepare a memo for the team regarding the financial options being considered. As the accounting department will be joining your memo is to prepare the staff for the call. The accountants are expected to use terms which may not be fully understood by the greater department. So your memo will be distributed before the call or you may be asked to speak on the call to assist everyone's understanding. The memo should discuss each of the following:

A new product line is also being proposed and it is expected that the accountants will discuss this option. Explain the difference between fixed and variable costs and state at least three examples of each that the company may incur.

Some employees have raised their concern that the new product line will not be profitable and that it will cost more to produce the new product than will be made. Explain the break-even point with particular focus on why a break even point is not immediate but rather is reached over time.

Answer 1

Basis	Variable Cost	Fixed Cost
Definition	Variable Cost changes its value with the change in production levels as it increases with the increase in the unit of production and decreases with the decrease in unit of productiob	Cost that does not changes its value with any change in the qunatity of goods produced or services that are sold
Nature	Fixed costs depends on time	Varibale cost depends on Volume of production
Occurrence	These costs are incurred even if the quantity is produced or not. Fixed Cost cannot be controlled	These costs are incurred only when the production starts. It can be controlled.
Constant or Variable	Constant over a period of time	Variable. Chnages wih the production or output level.
Elements	Fixed Production Overhead,Fixed Administration Overhead, Fixed selling Overhead	Direct Labour, Direct Material , Other Direct Production costs, Vatiable administration overhead, Variable selling Overhead
Examples	Material Consumed in Manufacturing, Wages Payable for manufacturing                     Postage and Stamps, Printing and Stationary, Sales Commissions, consultants Commission	Rent, Insurance, Salaries, Deprecation

The Breakeven point (BEP) is that quantity of output sold at which total revenues equals total costs- that is the qunatity of output sold at which the opearting income is 0. The braekeven point tell how much of output needs to be sold to avoid a loss.

Breakeven Point is something which is not immediate but reached over time.This is because entity might not reach the Break even point level of output if the demand is lower which means if the Break even point level is 100 units but the demand is only 90 units then the entity will have to incur a loss. As the entity grows with time, its demand also rises leading to increased production levels and therefore, it may surpass the Breakeven Point level.

Moreover, Breakeven Point depends on the Contribution Margin and Fixed cost. If one or both of these changes, Break even Point will increase or decrease.

Therefore, continuous analysis and cost containment strategy can help an organisation achieve the breakeven Point Levels of Poroduction.