The paper "Break-Even Analysis and Valuation After Five Years" is a marvelous example of a research paper on finance and accounting.
Break-even analysis for capstone is important in determining the point at which the company can shut down. It is also referred to as the Cos-Volume-Profit Analysis since it incorporates the cost of the goods sold and the profit to be realized thereafter. At this point, the total cost of capstone and its total revenue earned from business operations are equal. Several aspects of capstone must be brought into consideration while determining the break-even point.in most cases, the gross margin is included to ascertain the impact of an additional production cost. For capstone, the cost accounting department is charged with the responsibility of determining the break-even point at which the company is not incurring any loss or gain from its operations. The term break-even means neither loss nor profit has been broken, thus, the company is operating at an optimum level. However, it is important to note at this point, capstone has already incurred some opportunity cost and a lot of adjustments have been made on its capital (Nickolao, Sophocles & Michael, 2013).
Capstone will expect returns from the risky investment it has made but the reality is that the firm is paying its costs from its daily operation with a net profit of zero. The graph is usually drawn with sales being represented in quantity or revenue earned. The cost is comprehensive of both variable cost and fixed costs. For capstone to be at break-even, the variable costs of every unit of its products must be lower than its prices. This is important in ensuring that the units sold equally contribute towards covering the fixed cost of the company. Capstone should focus on producing more goods that its break-even point in order to make a profit. However in case selling more goods is not possible, then capstone can consider either reducing its fixed cost, reducing the variable costs or increasing the sales price of each product. These strategies will help the company to reduce its break-even point (Marcell, Ernst &Gerald, 1992).
The main purpose of the break-even point for capstone is to help it determine the least quantity to produce in order to continue making a profit. Moreover, capstone may use this data to determine the impacts of its earnings to the market in which it operates. This important data is possible because capstone will be using the analysis to show the relationship between profits, sales, and cost, thus the managers of the capstone are more likely to predict the next phase of break eve.
The Break-Even Point
The break-even point is the point at which Total Contribution = Total Fixed Cost:
Unit Contribution x Number of Units = Total Fixed Cost
Number of Unit = Total Fixed Cost / Unit Contribution
Break-even-point in terms of sale volume is given by
Break-even (in Sales) = Fixed Costs / CP
Where R is revenue generated, C is cost incurred i.e. Fixed costs + Variable Costs or Q * P (Price per unit) = TFC + Q * VC (Price per unit), Q * P - Q * VC = TFC, Q * (P - VC) = TFC, or, Break Even Analysis Q = TFC/c/s ratio=Break Even. Therefore, the total FC will be Rent=21,600 + telephone=3000 amounting to $24,600.
Analysis of the break-even is possible by producing various BEP by inserting different values of unit price into the graph. Aline of the total cost is drawn to show the total cost associated with each level of the unit price. Other costs like the fixed cost and the variable costs are also inserted into the graph as shown above. The points of intersection of the TC and the different variable cost indicates the different BEPs being analyzed. The quantities at each BEP and the sale price at each BEP are read from the graphs. In addition, BEP analysis is based and only looks at the cost and omits the critical aspects of the sale to capstone. Moreover, the BEP for Capstone assumes that the average VC and FC are constant. In addition, it is assumed that Capstone will sell the same number of goods as it produces. Moreover, it is assumed that a constant sale mix prevails in Capstone.
Valuation after Five Years
Valuation of capstone after five years was done using the hybrid valuation approach. In this approach, the assets and income of a capstone company were combined and valued so that a realistic value of Capstone Company be determined. This method was chosen because it is more realistic and provides a true value of Capstone Company after five years. Capstone Company is expected to operate in a going concern for the next foreseeable time. After five years of operation, it is expected that the company will be put under review to evaluate its overall performance. During this period, the company will be subjected to valuation in order to determine its net worth and any goodwill obtained.
During the five year valuation, it is expected that capstone will involve the services of the qualified valuer to help ascertain the exact value of the company after the five years of operations. At the end of the five years, the capstone is expected to have registered sale value of $1,481,988. In addition, the returns of the company are expected to continue rising with each return registering a different value. Moreover, the capstone is expected to concur a market share of $ 24,425.50 at the end of the five years of operation. This will see the net worth of the company stands at $646,180 while the management compensation standing at $325,000, the total cost of office equipment will be $25,526 at the end of the five year trading period. This will be a combination of the net worth of $492,592 and net liabilities of $141,443
Finally, it is expected that capstone will remain a profitable company for the feasible duration of time making it a viable company in the market sector. Moreover, the kind of business operation that Capstone has engaged in will see the company remain competitive and profitable to the investors. The management is thus expected to relate well with their employees to ensure corporation that will help drive the company to greater heights.
Marcell S, Ernst T. Gerald H. L. (1992). Break-even Analysis: Basic Model, Variants,
Extensions. Chicago printing press, Chicago
Nickolaos T. Sophocles P. Michael Z. (2013). break-Even Analysis.. New Delhi in. New Delhi.