Discussing profitability

Your operating costs are the day-to-day expenses of running your business. Fixed costs include such items as rent, insurance, basic advertising, heat and light, property taxes, license fees, and so on.

Variable costs fluctuate according to the volume of your business. They are such costs as salespeople commissions, shipping and delivery expenses; some wages, and the cost of goods sold increase when you are busy and decrease when your business is slow.

Calculating Break-Even by Units sold:

Let BE = break-even point in units of products.

FC = total fixed costs.

SP = selling price of one unit.

VC = variable costs for one unit.

Your formula is

FC

B E =

^{SP - VC}

Break-even is an accounting tool that can take a great deal of the guess-work. By using a mathematical formula based on your fixed and variable costs you can determine how many units (hours, products) to sell in order to break-even-that is to recover your expenses.

Exercise 12. Your company starts producing cans for marinating. Read the text and solve the tasks:

Here are a few early figures for the can project. On production we've got fixed costs of $ lm dollars, more or less, before we even make anything. That's just the equipment! Now, somebody told me that they think that to make 200,000 units would cost us another $500,000 in labour and materials and other variable costs. Now, as things are at the minute we don't really know what the selling price will be. The market research boys are working on it; but my guess is that it should sell at about $10. About. I haven't worked out how many of the things we'd have to sell to make a profit, but it won't take a minute … You know, a project like …

1. If the can's selling price is $10, how many will have to be sold to make a profit?

2. If 1,000,000 cans are sold, what will be the minimum selling price?

Exercise 13. Read the balance sheet of Newsland company and compare balance figures in 1998 and 1999.

Compare the figures in 1998 and 1999 using the expressions: above/up and below/down. Express variance using by. e.g. The current assets in 1999 are above (up) the current assets in 1998 by 150 000.

Balance Sheet
ASSETS 1999 1998	LIABILITIES 1999 1998
Current Assets Cash $450 000 $300 000 Marketable securities at cost market value: 850 000 460 000 Accounts receivable Less: allowance for bad debt: 2 000 000 1 900 000 Inventories 2 700 000 3 000 000 Total current assets $6 000 000 5 660 000 Fixed assets (property, plant and equipment) Land $450 000 $450 000 Building $3 800 000 3 600 000 Machinery 950 000 850 000 Office equipment 100 000 95 000 $5 300 000 $4 995 000 Less: accumulated depreciation 1 800 000 1 500 000 Net fixed assets $3 500 000 $3 495 000 Prepayments and deferred charges 100 000 90 000 Intangibles (goodwill, patent, 100 000 100 000 trademarks) Total assets $9 700 000 $9 345 000	Current liabilities Accounts payable $1 000 000 940 000 Notes payable 850 000 1 000 000 Accrued expenses payable 330 000 300 000 Federal income tax payable 320 000 290 000 Total current liabilities $2 500 000 $2 530 000 Long-term liabilities First mortgage bonds; 5% interest, due 1985 2 700 000 2 700 000 Total liabilities $5 200 000 $5 230 000 STOCKHOLDERS' EQUITY Capital stock Preferred stock, 5% cumulative, $100 par value each; authorized, and outstanding 6 000 shares 600 000 600 000 Common stock, $5 par value each; authorized, issued and outstanding 300 000 shares 1 500 000 1 500 000 Capital surplus 700 000 700 000 Accumulated retained earnings 1 700 000 1 315 000 Total stockholders' equity $4 500 000 $4 115 000 Total liabilities and stockholders' equity $9 700 000 $9 345 000

Exercise 14. Imagine that your company needs financing. Prepare your business plan, using the questions:

1. How will this finance be obtained?

1. debt-from whom and under what condition?

2. equity-from whom and what percentage of total equity?

3. combination of debt and equity

4. sale of assets-what assets and their expected value?

5. from existing sales revenue.

2. What institution have or will be approached for finance?

3. Why have these institutions been considered?

4. What are the terms of this financing?

5. What effect will it have upon firm's cash flow?

6. What collateral will be offered to support any loans?

7. Are these financial plans is accordance with the company's stated objectives?

8. Will these financial plans provide the resources needed by your firm?

Keys

Exercise 3.

• al: critical, financial, industrial, international, national;

• tion: allocation, contribution, disinflation, inflation, maximization, operation, production;

• ment: environment, management, statement, unemployment.

Exercise 9.

1.000.000

a ) 133.334; BE= =133.334;

10 - 2,5

F - 1.000.000

b ) $ 3,5; 1.000.000 = .

^{X - 2,5}

1.000.000 x - 2.500.000 = 1.000.000.

1.000.000 x = 1.000.000 + 2.500.000.

1.000.000 x = 3.500.000.

x = 3.5.