Operation Management aggregate planning of a given product

Part 3:

A)

b) Break Even Analysis in economics, business, and cost accounting refers to the point in which total cost and total revenue are equal. A break even point analysis is used to determine the number of units or dollars of revenue needed to cover total costs (fixed and variable costs).

Formula for Break Even Analysis

Break even quantity = Fixed costs / (Sales price per unit – Variable cost per unit)

A managerial accountant in charge of Company, which sells sauce. He previously determined that the fixed costs of Company A consist of property taxes, a lease, and executive salaries, which add up to $100,000. The variable cost associated with producing one packet is $2 per unit. The sauce packet is sold at a premium price of $12. To determine the break even point of Company’s premium sauce packet: :

 

Break even quantity = $100,000 / ($12 – $2) = 10,000

Graphically Representing the Break Even Point

The graphical representation of unit sales and dollar sales needed to break even is referred to as the break even chart or Cost Volume Profit (CVP)graph. Below is the CVP graph of the example above:

 

 

Explanation:

1. The number of units is on the X-axis (horizontal) and the dollar amount is on the Y-axis (vertical).

2. The red line represents the total fixed costs of $100,000.

3. The blue line represents revenue per unit sold. For example, selling 10,000 units would generate 10,000 x $12 = $120,000 in revenue.

4. The yellow line represents total costs (fixed and variable costs). For example, if the company sells 0 units, then the company would incur $0 in variable costs but $100,000 in fixed costs for total costs of $100,000. If the company sells 10,000 units, the company would incur 10,000 x $2 = $20,000 in variable costs and $100,000 in fixed costs for total costs of $120,000.

5. The break even point is at 10,000 units. At this point, revenue would be 10,000 x $12 = $120,000 and costs would be 10,000 x 2 = $20,000 in variable costs and $100,000 in fixed costs.

6. When the number of units exceeds 10,000, the company would be making a profit on the units sold. Note that the blue revenue line is greater than the yellow total costs line after 10,000 units are produced. Likewise, if the number of units is below 10,000, the company would be incurring a loss. From 0-9,999 units, the total costs line is above the revenue line.

C) product lines for spicy sweet chilli sauce are : sugar, water, pickled red chilli, vinegar, garlic and salt.

For example, if we want to sell 10,000 units, we'll need the ingredients mentioned above in some quantity. 

We must align these in accordance with the company's 10,000-unit mandate. 

Sugar will be 20g, water will be 20g, and pickled red chilli will be 20g for a 2$ package of sauce weighing 100g.