Break Even Output
56) Pierre believes that his break-even output may be too high. With references to the case study, what would be the best approaches for him to use in order to reduce his break-even output? Justify your view. (15 Marks)
To find what approach would be best for Pierre to use in order to reduce his break-even output, we should calculate the original figure. To do this we take his fixed costs (£48,000) and divide by his contribution per unit (SPPU – VCPU) = (£9.20 - £3.79) = £5.41 Therefore his breakeven output = (£48,000 / £5.41) = 8,872. Considering that his expected sales = 9000 his breakeven output is very high.
To start with Pierre should think about not renting his business premises anymore, as it adds £20,000 per annum to his fixed costs. He could instead find a much cheaper alternative or even go for his rejected option of working from home. Subsequently this would mean that he would not have to pay any rent, therefore reducing his fixed costs by £20,000. His new breakeven output would equal (£28,000 / £5.41) = 5,176, a reduction of 3,696. The only likely disadvantage of this option is stock control problems. However this problem is minimal compared to the savings he would make.
Another possible option is for him to try and reduce his variable costs. Pierre’s rejected T-shirt had medium quality and cost £2.29, assuming the selling price stays the same this would increase the contribution per unit and therefore reduce his breakeven output. On the other hand Pierre’s primary market research showed that repeat sales would depend more on the quality of the T-shirt than on the price. Lowering the price may result in lower demand and consequently lower profit. Pierre could also reduce his variable costs by reducing the wage of his two employees as they are paid a higher rate than his competitors to keep them loyal and their morale high. However in doing this it could affect the company’s stock control and delivery time.
Considering all of the evidence, the best
To find what approach would be best for Pierre to use in order to reduce his break-even output, we should calculate the original figure. To do this we take his fixed costs (£48,000) and divide by his contribution per unit (SPPU – VCPU) = (£9.20 - £3.79) = £5.41 Therefore his breakeven output = (£48,000 / £5.41) = 8,872. Considering that his expected sales = 9000 his breakeven output is very high.
To start with Pierre should think about not renting his business premises anymore, as it adds £20,000 per annum to his fixed costs. He could instead find a much cheaper alternative or even go for his rejected option of working from home. Subsequently this would mean that he would not have to pay any rent, therefore reducing his fixed costs by £20,000. His new breakeven output would equal (£28,000 / £5.41) = 5,176, a reduction of 3,696. The only likely disadvantage of this option is stock control problems. However this problem is minimal compared to the savings he would make.
Another possible option is for him to try and reduce his variable costs. Pierre’s rejected T-shirt had medium quality and cost £2.29, assuming the selling price stays the same this would increase the contribution per unit and therefore reduce his breakeven output. On the other hand Pierre’s primary market research showed that repeat sales would depend more on the quality of the T-shirt than on the price. Lowering the price may result in lower demand and consequently lower profit. Pierre could also reduce his variable costs by reducing the wage of his two employees as they are paid a higher rate than his competitors to keep them loyal and their morale high. However in doing this it could affect the company’s stock control and delivery time.
Considering all of the evidence, the best