Compensation expense is the main variable cost of the company. This account includes for wages and other regular benefits of employees. Regular benefits include stock options. There is several fixed cost in the start-up operations. Leasing are to be paid to real-estate suppliers as there are only minimal properties that the company have in its portfolio. Computer equipment, software, and telecommunication facilities are all necessary capital to run the business and achieve competitive advantages over rivals. Furniture complements and supports the equipments in place and also serve as facilities in day-to-day business of the company. Buildings as well as leasehold improvements are necessary costs to establish a favorable workplace for both managers and employees.
The Spreadsheet shows how the break-even is computed. The formula for break-even is total revenue must be equal to total cost. Total revenue is copied from the estimates of the company for its first start-up income statement (Year 2008). On the other hand, total cost is composed of variable and fixed costs. The variable costs are collected from the income statement for the start-up year while fixed costs are collected from the balance sheet of the start-up year. It is to note that the 2009 value of “Property and equipment” is reduced because of the depreciation and amortization applied to them.
Before the price, the issue to consider in break-even analysis is the quantity of services to be provided. This is computed by expanding and manipulating the TR = TC formula by applying algebra and compute for Q. The computation resulted to 20.44 or simply 20. This amount is gathered because total revenue is given which is £2,856,000. Due to this, the revenue serves as basis for obtaining a certain level of Q. In essence, Q is the number of employees that the firm would initially deploy in order to transact business with clients. The variable costs indicate that for every employee, there is a cost of £50,000. The estimate of the total revenue, thus, limits the number of employees that the company can deploy. In this way, the firm avoids being oversize even if the market is already saturated.
When the Q is already found, the equation in the expanded break even formula has only price or P as its variable. The computation of P is as simple as the computation of Q. This resulted to £139,726.03 of price per client. Seemingly, the service price is large but this indicates that most of the clients of the company will be business corporations and with large workforce. This justifies the high computed price. Again, the price is limited by revenues as well as the quantities of employees that can be deployed. The price states that at the level of £139,726.03 and quantity of employees deployed at 20 the firm can have revenues of £2,856,000 which is sufficient to cover variable cost and fixed cost. Having a workforce, of course, is an instrument of corporate growth so the creation of workforce of the company makes it classify as a going concern entity.
The most critical factor is the fixed costs primarily because the price is computed early in the inception of the business. This is when the value of the properties and equipments are in full amounts. This is found by framing the three major factors (e.g. variable costs, fixed costs and Q) in determining the price of corporate services into three different scenarios. Optimistic scenario refers to a 100% increase in contribution, pessimistic scenario refers to 100% decrease in contribution while expected scenario comes from the estimate of the company and serves as benchmark of the preceding scenarios. Fixed cost resulted to have the highest standard deviation among the three factors. Therefore, managers should pay attention on how to reduce the impact of fixed cost perhaps by employing more Q or by expanding operations.
Credit:ivythesis.typepad.com
0 comments:
Post a Comment