The subject to be discussed has been known for decades, however it is not used in many businesses and companies as it is, an excellent tool to help managers in making decisions.
Recently and out of curiosity I had the opportunity to briefly participate in a seminar that a specialist from the company where I work gave to executives of different levels on the subject with the aim of raising their particular knowledge about economics and in their general training, then I read a paper published on GestioPolis.com, where the subject was dealt with, in both works a similar approach was given, as in the case of the seminar given to Cos. that regardless of being university graduates, they had not tried it before and therefore could not have doubts beyond the explanation offered by the sufficiently prepared professor, while in the case of GestioPolis.com as a result of reading the material by people Interested parties appeared several questions that undoubtedly reflected that they were interested in the subject and that due to the characteristics of their companies or businesses they could not apply it because it lacked elements not understood by the scope of these works.
The validity of the use of this management tool, regardless of the size of the company, company or business and that in many of them it is not used due to ignorance or to think that it is more bureaucracy given the lack of knowledge of its scope, below A group of elements are exposed that can serve for the understanding and application of the same.
DEVELOPING
In much of the literature consulted, the subject is treated as something that is undoubtedly known and mastered and that leaves many loose ends that, if not specified, inhibit the implementation of this important and necessary tool to help decision-making by the direction.
It is important to clarify that the Balance Point, is also known as the Critical Point or Dead Point, but the definition is the same, “it is where the value of sales or the volume of a product and expenses (sales costs plus general expenses and administration) are the same, in other words, if quantities of products are sold or produced below that amount, the company will operate at a loss, while if products are sold or produced above that value, the company will operate with profits. ”. To achieve coincidence from now on we will call it the Equilibrium Point and we will represent it by PE.
The equilibrium point calculation can be developed with the help of mathematical formulations or using graphs that contribute to a better understanding of the concept itself.
The most general thing in the literature consulted is the use of the following mathematical formulas:
| Fixed costs
PE = or Fixed Expenses
Variable expends 1 - Sales To calculate the PE when it comes to the provision of services or productions of a wide variety of products and it is very cumbersome to do an analysis by product. PE = Sale Price / unit Fixed Expenses - Variable Expenses / unit For when you want to know the PE in quantity of products (physical units), eg pairs of shoes, m 3 of concrete, m 3 of aggregates, number of televisions, etc. |
To work and calculate PE it is necessary that costs be classified according to the way they behave in the production volume:
Fixed Expenses: Are those expenses that remain unchanged in their magnitude regardless of the variation in sales in monetary units or the physical volume of production.
Within this category are general and administrative expenses, the depreciation of tangible or intangible fixed assets, salary expenses and taxes, other expenses associated with the workforce, such as accommodation, food, etc. That are borne by the companies in the workers of the management and control of the factories, works, workshops and the expenses of the base business units.
Variable Expenses: These are expenses that fluctuate in correspondence with the variation of sales in monetary units or of product volumes in physical units.
Within this category are the materials for production, the productive services received.
When it comes to the salary of direct workers to production whose amount in number and magnitude of salary varies depending on the production to be achieved (performance or piecework payments) and with it taxes and other payments on account of the company, They can also be considered variables, although they must be subject to specific evaluation in each case.
Separating fixed costs from variable costs has other advantages:
- An effective control of costs An accurate and stable determination of prices at all levels of production volume Scientific planning of profits.
Before continuing, it should be clarified that in order to ensure that the PE calculation is supported and technically grounded, the company's accounting must reflect the economic facts, the procedure to record both expenses be defined within the Accounting Manual and ensure that said record correspond to reality, otherwise it is not possible to be certain that the calculated PE is the correct one and therefore, it cannot be offered to anyone to use as a decision-making tool. Today this does not happen in a considerable number of companies and that is the first choice that appears when trying to implement this process in business management.
It will also be necessary to bear in mind that for the purposes of using this tool, only those derived from sales are considered income, therefore other financial income should not be considered, in the same way as is expressed in the definition, neither can other financial income be considered expenses other than cost of sales and general and administrative expenses, and finally the profit referred to is the profit for the period resulting from the following operation: (Sales - (Sales Costs + General and Administration)).
The graphical representation of the PE will be called hereinafter Profit and Loss Graph and in abbreviated form Graph PG and its general representation appears in Figure 1, on the horizontal axis the number of units sold is represented, while on the vertical axis Costs, profits or losses are represented (the scale will grow from zero to the maximum value of income (income being the sum of expenses plus profit), which will be equal to the number of units sold for the price of sales), the line parallel to the horizontal axis will represent fixed expenses, which, as can be seen, do not vary with the increase in the volume of products sold.
V 1 V PE V 2
The line that begins at the point (0,0) represents sales and ends in the imaginary intercept between the volume of units sold on the horizontal axis and the value of sales on the vertical axis, while total expenses will be represented by the line that begins in the interception of the fixed expenses line with the vertical axis and they increase as a function of the increase in units sold, as a consequence of the movement of variable expenses as a function of the movement of units sold. The point where the income line coincides with that of the total costs is the PE, the value that corresponds to it on the horizontal axis (V PE) will be the quantity of products, while the value that corresponds to it on the vertical axis will be the value in monetary units of the sales corresponding to that quantity of products that must be achieved so that expenses are covered with income, that is, have no losses or profits.
If the quantity of products does not exceed the equilibrium point (V 1), the company will operate with losses and the magnitude of this loss will be the distance that exists between the sales diagonal and the total expenses line when they are cut by the line that represent the volume of products sold on the vertical axis, as seen in the red part of figure 1.
If the amount of products sold (V 2) exceeds the PE, the company will operate with profits, and the level of profit will be the difference between the same axes, but in the green part, as can be seen in figure 1.
As can be seen, the graph allows a greater vision and interpretation of what really happens at a certain moment and provided that the initial conditions (fixed expenses, variable expenses and / or sales price) do not vary.
Broadly speaking, PE is useful for studying the relationships between costs, volume and prices; It is useful for setting prices; to control costs and to make decisions about expansion programs (investments). However, the analysis of the PE has limitations, especially in its representation in this type of graph.
One of its limitations is that any line graph of the PE point is based on a constant sales price. Therefore, to study the profit possibilities for different prices, it is necessary to have a complete series of charts, one for each price, which makes this comparison complex.
The graphical analysis of PE can also be poor in relation to costs. As the level of sales increases, the company must hire additional workers, use overtime, or use some of the less productive facilities, which will produce an increase in variable costs. If additional plant and equipment are required to meet sales demand, fixed expenses will also increase in certain ranges. Such changes in the fixed and variable expenses of the company will influence the level and the slope of the total expenses function. As variable costs increase, the expense function will have a steeper slope, while changes in the level of fixed expenses will influence the ordinate at the origin or intercept of the total expenses line with the vertical axis.Therefore, a PE graph would be required for each set of fixed and variable costs, as well as for each price.
However, there is a variant of the graph to represent the PE that eliminates the aforementioned drawbacks and therefore allows several variants to be mounted and compared on the same graph and facilitate decision-making for management.
To work with this version of PE and its graphical representation, it will be necessary to add to the concepts already defined that of marginal income, this concept is closely linked to that of PE.
Marginal income: They are the difference between variable expenses and the sales price, so they could be mathematically represented by:
Marginal income = Fixed costs + profits
By closely monitoring marginal revenue percentages, any changes that threaten projected earnings will be readily noticed.
Cormink & Co, which covers variable cost techniques, HB Maynard, Industrial Production Engineering Manual, Chapter 6, Pages 6-135 - 6-144, Volume II, 2nd. Edition, Revolutionary Editions, Cuban Book Institute, Cuba, 1972.
The graphical representation of the same or associated PG Graph is described in figure 2.
You might ask yourself, why is the use of this tool so important and what is its true scope?
In essence, leading is about establishing an operations plan and controlling the results. The PE and the use of graphics to the associate can be of great help in the performance of both functions.
Among the functions that a director or manager must assume at any level, those of planning and control stand out, in both the employment of the PE and the graph to the associate play an important role.
Planning:
- The PG Chart can help management as it graphically represents the relationship between expenses, sales volume and profits. Planning
Profits consists of establishing a profit goal or objective to be achieved, calculating expenses and, as a result, the volume of sales, in products or in sales values, necessary.
- The PG Chart is an excellent means of forecasting the effects on earnings that a change in pricing policy may generate relative to other factors. The reduction or increase in profits that this pricing policy will generate and the changes it will cause in sales volumes and costs can be predicted. Of course, it must be stressed that the EP is not everything in this matter. But its use, combined with other techniques, facilitates the task of making decisions. The expansion of a business (investments to increase and / or diversify) alters its expenses. The PG Chart can help you detect the effect that capital investments will have before they are made. Bargaining for collective bargaining agreements is one of the most important issues that management can face.And in it, he stumbles upon the misconceptions of the public and workers about the nature of profits. The use of the PG Graph can serve as an educational instrument, showing that profits are only produced if the PE is exceeded and that the proposed wage increases raise this point, unless they are accompanied by greater efficiency at work. (Higher productivity or increase in sales prices. The danger of being displaced from the market due to a rise in prices can be demonstrated graphically. The use of the PG Graph also allows to represent and evaluate the influence of various products in the analysis of the profits of the company and to look for more effective variants.The use of the PG Graph can serve as an educational instrument, showing that profits are only produced if the PE is exceeded and that the proposed wage increases raise this point, unless they are accompanied by greater efficiency at work. (Higher productivity or increase in sales prices. The danger of being displaced from the market due to a rise in prices can be demonstrated graphically. The use of the PG Graph also allows to represent and evaluate the influence of various products in the analysis of the profits of the company and to look for more effective variants.The use of the PG Graph can serve as an educational instrument, showing that profits are only produced if the PE is exceeded and that the proposed wage increases raise this point, unless they are accompanied by greater efficiency at work. (Higher productivity or increase in sales prices. The danger of being displaced from the market due to a rise in prices can be demonstrated graphically. The use of the PG Graph also allows to represent and evaluate the influence of various products in the analysis of the profits of the company and to look for more effective variants.unless they are accompanied by greater efficiency at work (higher productivity or increase in sales prices. The danger of being displaced from the market due to a rise in prices can be demonstrated graphically. It allows representing and evaluating the influence of various products in the analysis of the company's profits and to search for more effective variants.unless they are accompanied by greater efficiency at work (higher productivity or increase in sales prices. The danger of being displaced from the market due to a rise in prices can be demonstrated graphically. It allows representing and evaluating the influence of various products in the analysis of the company's profits and to search for more effective variants.
Control:
- The PG Chart is a valuable means of informing management at any level about the progress of the business by adding more concrete details, it can be useful as a cost control mechanism and, as such, it serves as a guide to operations personnel by providing of specific information on the progress of things. Control by variable budgets takes into account the expenses corresponding to the different levels of business activity. The PG Chart helps to show the expenses that should have been in relation to the income and helps to differentiate the profits that are due to the volume of activity, from those that have their origin in the efficiency of the operations.
The PG Chart is perfectly adaptable to the analysis of the PE from marginal income, or a presentation that highlights the trajectory followed by the profits.
For a clear interpretation of this way of evaluating PE it is necessary to highlight the following definitions:
The currency is chosen according to the country and they are grouped as more practical, for the purposes of this work they will be considered with the name of monetary units (um).
The graph as expressed in the vertical axis, from zero (0) upwards grows positively, represents the level of profits and from zero (0) downwards represents fixed costs or losses, therefore negative numbers are used, if it does not occur nothing, fixed expenses are losses. On the horizontal axis, sales are reflected in monetary units or in products.
If a level of profit is projected for a certain level of sales, knowing the fixed expenses, the line that joins the value of the fixed expenses (negative) on the vertical axis with the intersection of the profits and the expected sales, by intercepting the Line zero will define the Value of Sales or physical units in the PE.
In this case, PE is the point where marginal income equals fixed expenses, that is, where the profit line intersects the zero line (0).
Safety Margin: It is the percentage of sales beyond PE, or in other words, the percentage by which sales can drop, before profits disappear.
The path slope of earnings can be calculated mathematically as follows:
Pending = (Fixed Costs + Profits (or Losses)) / Sales or
Marginal Revenue / Sales
If the following data are assumed for the graph represented in Figure 2:
Sales price CU20 / U To subtract: Variable Costs
- Raw materials 11 um / U Labor 3 um / U Other expenses 2 um / U
Total variable costs 16 um / U
Marginal income CU4 / U
Marginal revenue is 20% of sales (4/20 * 100)
Therefore, for a sales value of 4 000.0 Kum, the marginal revenue will be 800.0 Kum, if 400.0 Kum correspond to fixed expenses, then it is evident that the profits are 400.0 Kum, which represents 10% of total sales.
The 50% Safety Margin (PE Sales / Analysis Point Sales) = (2,000.0 / 4,000.0) * 100.
Analogous to the graph in figure 1, the area colored in red is the area of losses and therefore, all sales values lower than PE mean that the company will operate with losses whose amount will be the one that results from projecting on the vertical axis the interception of the value of sales with the profit line.
The area colored in green corresponds to the profit area, so all the sales values in that area will reflect that the company will operate with profits and sales that exceed the PE when intercepted with the profit line and projected on the axis vertical will report the value of profits.
Below are examples that demonstrate by themselves the advantages of this type of graph in relation to the previous one and how all its limitations are solved with it.
In figure 3 a company is represented during four years of operation and, as with the use of the PG Graph from marginal income, it marks a danger signal when other coefficients indicate that everything is going to "ask for mouth".
This is a company that presented a continuous increase in profits until the fourth year of production and sale of a product. But the increase in sales volume masked the fact that its variable costs were consuming an increasing percentage of sales. In years 1 and 2, the variable costs keep the same proportion with the volume of sales, which is observed by the fact that the successive points of the intersection of sales with profits fall on the same line and therefore the PE of both years. However, the lines resulting from the interceptions of sales and profits in years 3 and 4 reflect that the PE grew in both cases, which is evidence that the profits increased only as a consequence of the increase in sales in higher proportions.All of this is a reflection of the fact that profits by weight of sales were lower in year 3 than in year 2 and lower in year 4 than in 3. This situation reflects a downward trend in profits. When sales fell in Year 5, the company earned less than in Year 4, despite selling more.
It is worth noting that in this company the fixed costs remained constant in the five years, so the slope of the profits was only affected by the variation of the variable costs, this is not always the case but this type of graph solves without complications that situation as it will be appreciated later.
The example shows how it has been possible to reflect the results of several years with variable expenses, PE, sales and different profits, which solves one of the limitations of the previous version of the PG Graph represented in figure 1.
It is necessary to clarify that using one or another type of graph, the PE can be calculated mathematically with the same formulas described at the beginning in Box 1.
Below we can see another practical application of the PE for decision-making and therefore the effectiveness of the PG Chart based on marginal income, Figure 2.
The example deals with the topic of Operating Leverage:
For a physicist, leverage involves the use of a pulley to lift a heavy object with little force. In business terminology, it implies that a high degree of leverage implies that a relatively small change in sales produces a considerable change in net operating income. The meaning of the degree of operating leverage is illustrated below in figure 4, three companies (A, B, C) with different degrees of leverage are compared.
If the PG Graph in figure 1 were used for comparison and analysis, it would be necessary to make three independent graphs, one for each company, which complicates the work and does not allow us to see as a whole on the same plane the reason for the situation and the decision to take.
The PE in table 2 is expressed in monetary units / physical units for a better understanding, if it were productions of a diversity of products or services provided, it could only be expressed in values (um).
With the use of the PG Graph from the marginal income, the best variant can be analyzed and the best decision can be made.
Data:
| Concepts | UM | Company A | Company B | Company C |
| Kind of product | - | the same | the same | the same |
| Quantity | OR | 200 | 200 | 200 |
| Sales price | um / U | 2.00 | 2.00 | 2.00 |
| Total sales | um | 400,000 | 400,000 | 400,000 |
| Fixed costs | um | 20,000 | 40,000 | 60,000 |
| Variable cost | um / U | 1.50 | 1.20 | 1.00 |
| Total variable cost | um | 300,000 | 240,000 | 200,000 |
| Total profit | um | 80,000 | 120,000 | 140,000 |
| Marginal income | um / U | 0.50 | 0.80 | 1.00 |
| Total marginal income | um | 100,000 | 160,000 | 200,000 |
| Breakeven | U / um | 40,000/80
000 |
50,000 / 100,000 | 60 000/120
000 |
| Total cost per unit | um / U | 1.60 | 1.40 | 1.30 |
Table 2
Company A is seen to have relatively low fixed expenses; it does not have automated equipment, so its depreciation costs are low. However, its variable costs have a relatively steep slope, equivalent to the fact that its variable costs per unit are higher than those of other companies, which negatively influences the level of profits, although the PE is the lowest of the compared companies, 40 000 units and 80,000 um.
Company B is considered to have a normal amount of fixed costs in its operations. It uses automated equipment (an operator can produce some or many units at the same time as company A, which assumes the same cost of labor) approximately equal to the average of the average companies in that branch of industry. Company B achieves its PE at a higher operating level (60,000 units, CU100,000) than Company A. In other words, Company B at a level of operations equivalent to Company A's PE would lose CU8,000.
Company C has the highest fixed costs. It is highly industrialized and uses expensive high-speed machines that require very little labor per unit produced. With such production your variable costs slowly increase.
As a consequence of the high cost of the machinery used, the fixed costs are high and the PE also exceeds that of the two previous companies. However, the slope as a consequence of the disproportion between the reduction of fixed expenses and variable expenses increases and with it the level of utility.
Operating leverage decisions can have a great impact on the position of both marginal revenue and unit cost, the former because although fixed costs increase, they are fully based on increased productivity (reduction of variable cost), which translates in a substantial increase in the level of profit. From the point of view of unit costs, it is reflected in the same way, since although the fixed cost increases, the variable is reduced in a greater proportion causing a significant reduction in total costs, as can be seen in the previous table.
These results have important consequences. With an operating volume of 200,000 units, Company C has a substantial cost superiority over its competitors, especially Company A. Company C could reduce the sales price of its products to CU1.50 / U, which could not be assumed by company A since it is above its total costs and would still have a profit margin by weight of sales of 13% (0.20 / 1.50), which is higher to the average margin of that branch.
This analysis shows that the combination of a high volume of products with a low unit cost can displace competitors from the market and thereby strengthen their market position, sales volume and profits. A real case happened to IBM with the introduction of computers (PC) in 1981. In 1984 the volume of units was already 2 000 000 million per year, due to the low costs associated with that high volume, IBM was in conditions to reduce prices by 23% and thereby put pressure on competitors with low volume and high costs despite the inflation at the time, putting several out of the market and of course IBM strengthened its position in the market, its sales volume and its profits.
This next example, how the use of the PG Graph can be considered from the marginal expenses in a case of a company that produces several products which have different costs, sales prices and therefore also different marginal income:
| Product | UM | Sales | Marginal income% | Cumulative marginal income |
| TO | um | 1 000 000 | 30 | 300 00 |
| B | um | 500,000 | twenty | 100,000 |
| C | um | 2,000,000 | 10 | 200,000 |
Table 3
The variant of the PG Chart in this case is called HR (Hip-roof-chart) and you can see the profit line for each product and its average line.
As the fixed costs are equal, the variation in marginal revenue is due to the variation in the level of utility, therefore it is evident that product “ A ” is the one that contributes the most to the utility of the company, which is also appreciated in the greater slope that it has in relation to the other two.
After an analysis of this type, the management is in a position to make decisions regarding the search for greater profit and reduction of operating costs that could be achieved even without increasing sales. If there is production capacity for product “ A”, the production and sale of this product can be increased and the production and sale of product C can be reduced as far as possible.
In figure 5, in dashed lines, the variant of increasing product “ A” in sales by one million CU and reducing product C by the same amount, generating CU200,000 more profit, which is also observed in the increase of the slope of the total profit line.
With this, it would achieve a greater use of the installed capacity of product “A”, a greater profit and even price analysis that could lead to a better positioning of this market with respect to its competitors.
Another example for which the application of this variant of Graph PG is practical is related to an increase in the wages of workers, both for those whose expenses are fixed, and those whose expenses are variable.
Suppose that the demand of the workers and their union organizations to a private company requires an increase in salary that is in the order of 12% for personnel whose expenses are fixed and 21% for those whose expenses are variable are variable or in the case of state-owned companies, the state plans to make a similar increase in companies in a certain branch of the economy.
| Description | Last year expenditure | Projected expenses | Difference |
| Sales | 22 200.0 | 22 200.0 | 0.0 |
| Fixed costs | 3 480.0 | 3 724.7 | 244.7 |
| From it: Salary expenses and fixed taxes | 2,039.3 | 2 284.0 | 244.7 |
| Variable expends | 17 520.0 | 18 487.6 | 967.6 |
| From it: Salary expenses and taxes | 4 607.8 | 5 575.4 | 967.6 |
| Marginal income | 4 680.0 | 3 712.4 | -967.6 |
Table 4
It is evident that with an increase in expenses of 1 212.3 Kum (244.7 + 967.6), with the same price of the products or services that are offered and with the same level of sales, it is intended to maintain the level efficiency than before raising wages. Marginal revenue is dramatically reduced (967.4 Kum) despite the increase in fixed costs, as a consequence of the reduction in efficiency that translates into losses in operations of 12.3 Kum.
Something could be decided that from all points of view would be unethical and violate all principles, since it would be based on reducing the workforce of workers whose expenses are fixed by 12% and increasing the performance standards for workers whose expenses are variable by 21% (equal to reducing the workforce by the same amount), this would not be an increase in salary, but rather to mask an increase in the amount of work with a “salary increase”. The PG Chart of Figure 6 reflects the variation in the break-even point that generates this increase in expenses.
In figure 6, the effect that the increase in wages would cause in the results of the company is graphically represented since it would act directly, on the cost of sales and on general and administrative expenses without there being any concrete action on the rest of the expenses that cause compensation and therefore, that the company subjected to these increases can offset them.
The projected PE exceeds sales and therefore will operate at a loss, if the company intends to achieve the same level of profits as at present, by applying the project of salary increases, it will have to sell securities in the vicinity of 30,000.0 Kum, for this it had to have a market that assumes that increase and untapped production capacity that assumes the same, since if it had to start an investment process to assume such an increase, the comprehensive analysis including that of the PE would have to include what related to investment, if we want the analysis to reflect reality and provide management with information for decision-making.
This example is more than eloquent, since it shows that an analysis of this type prior to the decision will provide sufficient elements to convince the workers and their representatives or to encourage the government that the total increase requested or planned according to the case is not possible because It would put the company in bankruptcy and that would lead to the disappearance of the organization itself or would make it clear that it would be necessary to take other parallel measures to cushion the effect of the increase in expenses due to this cause. Decisions should never be made due to pressure or necessity, even without having the necessary elements that promote knowledge of the cause and provide concrete elements of the consequences of continuing with its application.
Finally, an example will be treated of how combining the variable expenses budget and the marginal income analysis in the PG Graph, the production of a product that can be produced by competitors and for which the potential customer is willing to pay can be assumed. up to a ceiling price lower than that which could normally be assumed by the company.
The theory of variable spending control is simple. It is based on the fact that fixed costs should not be charged to the product, by definition we have already seen that fixed costs do not vary with the amount of products or services, whether there are few or many products or services, the fixed costs will remain unchanged. Therefore they are a burden on the business as a whole and not for each product or service in particular.
Variable costs are the opposite, they are clearly linked to the products that originate them. They represent the disbursements that the company has to make to manufacture each product or provide each particular service.
It can be added that the difference between variable cost and selling price is gross profit, more commonly called marginal revenue. It is in what each product or service contributes to offset fixed expenses and to provide the company considered as a whole. The higher the unit marginal revenue on a product or service, the more profitable it will be to sell it.
How can you really appreciate this:
A company that produces ready-mixed concrete with a use of 70% of its available capacity is when it comes to making its profit plan, it realizes that there is a problem. The historical analysis made by the Department of Costs, regarding the cost of monthly concrete production, revealed that the monthly concrete production cost:
Produc. Monthly Total monthly cost Cost / m 3
- 15 000 m 3 ----------------- 1 275 000 um ---- 85.00 um / m 3 If I manufactured 18 000 m 3, adding 3 000 m 3 of mortar premixed ---------- 1,440,750 um ---– 80.04 um / m 3
The possibility of assuming with part of the available production capacity a monthly demand of 3,500 m 3 of ready-mixed mortar, requested by a customer who could only pay at a rate of 75.00 um / m 3, was being evaluated.
At the costs that the historical analysis of concrete costs showed, it was impossible to assume the production of ready-mixed mortar without leading the company to produce losses of 5.04 um / m 3 (75.00 - 80.04), that is say CU15,120 monthly losses, so it was clear that the business could not be assimilated.
However, a group of specialists decided to do an analysis using the principles of variable costs, they graphically represented the available information and found that the monthly fixed cost of the company was 459,000 CU and that the variable cost was only 54.40 um / m 3 and therefore all m 3 sold at a price above variable cost would increase the organization's marginal income.
Figure 8 shows how the total cost of monthly concrete production varies as a function of the total unit cost.
Graph 9 shows the effect of the additional sale of mortar at the total historical cost, the variation in PE as a function of this impact and the increase in marginal revenue as a consequence of the application of the variable cost analysis to solve the sales price, assume the production of the mortar with an increase in the profit for the organization, displacing the competitors that could not assume a lower price.
Figure 9 clearly shows the comparison of the situation of the company, the continuous line means what happens in the company selling 15,000 m 3 of concrete monthly, with a profit level of 525,000 CU of profits as a result of sell this volume of concrete at 120 um / m 3.
The dashed line with stripes and dots represents what would happen in the company assuming the 3 000 m 3 of mortar with the analysis of the total cost, selling it at a price lower than the total cost per m 3, as already explained.
The discontinuous line segment added at the end of the continuous line is the reflection of what will actually happen in the company when it assumes the production of mortar at a competitive price and that responds to the customer's expectations, although in that segment of the straight line appreciates that the slope decreases, reflecting that the level of profit per unit produced is lower, it is also appreciated that the company to exploit an idle capacity will increase its total profits above those it received with 15,000 m 3 by 61,800 cu. monthly, ie CU741,600 per year.
With this analysis, the company is in a position to assume the production and sale of mortar and position itself in this incipient market, at the same time that it increases marginal income as a consequence of increasing the level of profit.
Conclusions:
In general, an attempt has been made to give a broad vision not only of the scope and use of the PE and of the PG Chart associated with it in the decision-making process by management, but to show that with the use of the PG Chart associated with income marginal, the limitations on the application of these tools are eliminated in much bibliography and a graphic image is achieved that allows non-experts in these subjects to reach logical and rational conclusions in order to increase the level of profits, of sales and ensure the market positioning of companies.
We did not use the calculation of the PE mathematically in a conscious way since it is one of the most discussed aspects in terms of work that is presented on the PE and it is only a process of data substitution in the detailed formulas.
On the other hand, if the PG Graph is made on a graph paper with precision or is done with the help of computers, the coincidence between the PE calculated by means of the formula and graphically is total
Finally, with the use of a table in the Excel System, some simple formulas and the use of a line graph, the PG Graph and the curve representing profits are perfectly drawn, starting from the marginal income equal to the fixed cost when sales are zero and taking this to the total sales that are part of the analysis. The intersection of this curve with the zero axis (0) will represent the PE.
With significant frequency today, decisions are made about modifying price systems, increases in significant salary levels or investments, all with significant influence on the fixed and variable costs of one, a sector or the generality of the companies without making a analysis using this and other tools leading companies to critical situations without clarity of the impact and influence that each aspect had on the almost always negative result.
Not infrequently, in the face of these questions, "this increase comes from efficiency" is repeatedly wielded, something that cannot be technically refuted by those affected or demonstrated by those who demand efficiency, all of this because they do not use them in advance an objective analysis using these and other tools that can provide enough elements to make timely and correct decisions.
Bibliography
- Goxens and MA Goxens, Practical Encyclopedia of Accounting, Ocean Gpo. Empresarial SA; Spain, 2001 Financial; Basic Training in Finance "The Financial Economic Analysis"; DISAIC Electronic Book, Entrepreneur Library, GEPE-GECYT, Cuba, 2001. Higher School of Marketing Studies; International Marketing, Seminar given in Cuba in 2001 B. Maynard; Industrial Production Engineering Manual; 2nd Edition, Ediciones Revolucionarias, Instituto del Libro, Cuba, 1971. Ortiz Gilberto; The point of balance; GestioPolis; 2007 Sara Fernández López, Economic-Financial Analysis, University of Santiago de Compostela, Spain, www.5campus.com.
