Sample Essay
Since our variable cost accounts for 50 percent of the revenues therefore, no significant change can be expected for cost reduction in such a case. So if we increase the sales, variable costs increases, regardless of all the factors involved, in such a case costs cannot be pushed down by a firm to maximize profitability. The above table shows no matter how much increase is made in sales the variable cost will simultaneously increase. This is the weakness of this model where variable cost is directly related to revenues. Keeping in view this limitation, a firm has to control its variable costs to meet its sales objectives.
- Indentifying Key Points:
We have another key area of breakeven analysis or a point at which a firm neither makes a loss nor a profit. In our computations the breakeven point plays an important role in achieving a firm’s profit targets. Cost and the level of production are the two key variables in breakeven analysis. Higher costs with constant production lead towards higher breakeven point and vice versa. Table below identifies this relationship with respect to both cost and production:
|
Margin of Safety |
$ Millions |
|
Breakeven Sales |
3000 |
|
Margin of Safety |
2000 |
|
Margin of Safety Ratio |
40% |
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