Answer To: LUBM303_ XXXXXXXXXX Level: 6 Module: Business Analytic Assignment Code: LUBM303 Learning outcomes....
Sudipta answered on Mar 30 2021
Table of Contents
Question 1 2
a) Mathematical model 2
b) Calculation of profit or loss 3
c) Five years projection 3
d) Critical analysis of cost and revenue behaviour 5
Question 2 7
a) Calculation of correlation coefficient 7
b) Scatterplot 8
c) Impact of advertising on sales and advice to marketing manager 8
Question 3 11
a) Determination of break-even point and margin of safety 11
b) Suggestion to Raincoat Plc. 13
c) Factors to be considered before commenting on the course of action 13
d) Critical analysis of break-even model with respect to Raincoat PLC 14
References 16
Question 1
a) Mathematical model
A mathematical model has been developed to determine the profit and break-even point of the company MKF Ltd. A breakeven point shows the point where a company gains no profit or incur any loss. Different assumptions have been made for both parts.
· Mathematical model to compute the profit of the firm
Assumption: Total cost = C, Total sales =R, Profit = P.
Model: (R-C) = P
Computation:
Particulars
Amount (in £)
Selling price
360000
Fixed cost
60000
Variable cost
135000
Profit
165000
Table 1: Computation of profit
· Mathematical model to compute BEP of the firm
X-axis of the model representing units, it is assumed that total selling units is equivalent to total production units. The gap between cost curve and sell curve is representing profit. Y-axis is showing revenue figure and cost figure of the firm.
Fixed cost: £60,000
Variable cost: £135,000
Total cost: £195,000
Profit: £165,000
Revenue and cost (in £)
Total sells: £ 360,000
Output/Sold (Units)
Figure 1: Mathematical model
b) Calculation of profit or loss
Particulars
Per unit cost
Unit
Amount (in £)
Amount (in £)
Selling unit
NA
180000
NA
Selling price
2
180000
360000
Fixed cost
NA
180000
60000
Variable cost
0.75
180000
135000
Total cost
1.083333333
180000
195000
Profit
0.916666667
180000
165000
Table 3: Profit or Loss calculation
From the above section, it can be determined that based on the given estimation the company will generate a profit of £ 165,000 at the end of the year.
c) Five years projection
Particulars
2021 (in £)
2022 (in £)
2023 (in £)
2024 (in £)
2025 (in £)
2026 (in £)
Selling price
360000
396900
437582.25
482434.4306
531883.9598
586402.0656
Output
180000
189000
198450
208372.5
218791.125
229730.6813
Selling price per unit
2
2.1
2.205
2.31525
2.4310125
2.552563125
Fixed cost
60000
60000
60000
60000
60000
60000
Variable cost
135000
145800
157464
170061.12
183666.0096
198359.2904
Profit
165000
191100
220118.25
252373.3106
288217.9502
328042.7753
Table 4: Calculation of five-year projection
Figure 1: Line graph on a five-year projection
According to company’s plan they will be earning more from their sells hence, they need to invest more. As a result, both fixed cost and variable cost has been increased. Moreover, inflation could be another reason behind this higher cost. To reach the target of higher revenue the company has planned to produce higher unites at the same time selling price per unit is also increasing. As selling price is increasing at a higher pace while cost is increasing at a lower rate therefore, profit amount is also higher from its previous years between 2021 to 2026.
d) Critical analysis of cost and revenue behaviour
As per the above line graph, the blue line represents the selling price. Fixed cost and variable cost is presented in red and grey. Lastly, the yellow colour represents the profit figure. Through the graph, it can be determined that the selling price of MKF Ltd is significantly higher than the other three variables. How the company is getting benefited due to the projection and whether the projected figures are realistic or not is going to be discussed in the following section.
· As per the projections, it can be determined that every year MKF Ltd will be generating more revenue. The revenue figure for the next five years is depending on two factors. These two factors are selling price and quantity sold. Sold quantity is getting increased by 5% every year which is helping the firm to generate more revenue. However, there is an improvement in the selling price as well. a 5% improvement has taken place in the selling price as well. As a result, £ 360,000 was the revenue figure in 2021. However, it will be increased to £ 396,900 in 2022. Moreover, it will again increase to £ 437,582.25. Hence, the projection is showing the management team of MKF Ltd a positive outcome from the future.
· Marketing plan is the major cause behind higher fixed cost and variable cost. At the same time, the company has decided to generate more revenue which has reflected on the higher revenue figure.
· Selling price can be increased over the years due to external factors like inflation and decreasing price value for money. However, the proper evidence has not been provided which could justify the increasing rate of the quantity. A company will only produce higher quantities only if there is a high demand for the product in the market. It is really difficult to estimate demand for a project after five years. Therefore, the increasing figure in the output is not realistic.
· If the demand theory of the economy is being followed then it can be found that demand for a product increases only if the price gets decreases (Gries, 2020). As per the current situation, both factors are increasing at the same rate. Selling price and quantity are increasing by 5%. As demand theory is not being followed in the current context, therefore, the projection could be wrong. The company might generate lesser revenue in the future due to decreasing demand.
· According to the projection, it can be determined that the fixed cost of the company remained the same as it was in the base year. Starting from 2021 till 2026 the fixed cost remained £ 60,000. No circumstances have been followed before making this assumption. According to the economy, the price of products increases over time. Rental fee. Salary, tax and insurance are some of the common fixed costs (Liu and Tyagi, 2017). A company can't maintain the same fixed cost for five years.
· As per the projection, it can be found that variable costs increase by 6% every year. For example, the company had a total variable cost of $135,000 in the year 2021. It has increased to £ 150,255 in the year 2022. In the following years till 2026, the variable cost of the company has been increased drastically. This has also increased the total cost of the company. A company should make their strategies in such a way so that they could prevent the increasing cost (Razak et al. 2016). Increasing cost is natural while considering the market condition and other external factors like the economy.
· The projection has shown that the revenue increasing rate is 5% while the variable cost increasing rate is 6%. A company should take some initiatives in such a way so that they could achieve a higher revenue rate than the cost rate. The projection is completely opposite to the principles of a profit-making concern. Realistic facts like competition, increasing price of commodities, increasing labour cost is considered then the estimated costs are completely correct.
· The projection is also shown that the company will be incurring revenue every year. In the base year (2021) MKF Ltd has generated a profit of £ 165,000. It will be increasing to £ 186,645. In the following year itself, the profit amount will be £ 210.348.435. In the following two years in 2024 and 2025, the profit figure will be £ 236,303.1945 and £ 264,719.894 respectively. The increasing profit rate is quite impressive from a business perspective however, whether the company will be able to ensure that profit or not is a matter of question.
· If the concept of the price value of money is taken into consideration then it can be found that the value of money decreases over time. For example, if a person is able to buy a specific quantity with a certain amount of money in a year then the person will have to spend more money to get the same quantity of the product in the following year. Keeping this concept in mind, the profit figures in the next five years are not that impressive.
Question 2
a) Calculation of correlation coefficient
Year
Advertising expenditure (X)
Sales revenue...