Introduction
It has already been seen that the breakeven point is the intersection of total sales with total costs, for this the organization requires a minimum of sales to be able to cover its income and expenses and report neither loss nor profit.
dynamic-equilibrium-pointDespite this, the investments made in the organization have not been considered, such as the machinery and equipment that is being used, these must fear a minimum return to cover aspects such as: low value due to obsolescence, surplus price when replacing it, the cost of money, etc.
When analyzing the equilibrium point, it is traditionally omitted to consider the investment that is necessary to operate at the volume in which apparently neither profit nor loss will be obtained; Failure to consider this indicates that the breakeven point has not been fully found, since if the money invested in the company instead had been invested in fixed income securities, it would be producing a return for the single course weather. This situation can change for the money that is invested in the organization, be it your own or someone else's. Therefore, a new Balance Point is determined where we consider these factors, this is the so-called Dynamic Balance Point, which we will deal with below.
Dynamic Balance Point
Concept
A dynamic equilibrium point is one that changes over time and where over time there are changes in assets or investment. At this time, executives face strong economic problems, which can be resolved with correct decision-making, in order to make the appropriate decisions in the administrative and financial field. For this reason, more factors need to be integrated to determine the point where it is not lost and profits begin to be made, and we know this with the Dynamic Equilibrium Point.
objective
The point of Dynamic Equilibrium provides information with which we can meet the following objectives:
- Determine the minimum production or sale necessary to reach the equilibrium point since profits are planned from this point Investigate and capitalize on the company's profits to the maximum and minimize its weakness in times of depression Control operations scientifically since it provides an analytical record of the relationship that exists at any volume between costs, sales and profits. Know the amount and volume to produce or sell so as not to lose and start to gain, considering the various elements that affect profit and not only Fixed and Variable Costs.
Importance
Today the drastic changes in the country's economy, the businessman faces a series of problems that can be solved with proper planning, in order to be in a position to make the most appropriate decisions in the administrative and financial field.
As a result of this, you need to plan especially in the short term, not only not to lose and not win, but, to recover the fixed part of the investment, plus the variable part of it, have a legitimate profit, pay the corresponding taxes and the participation of workers in the profits of the company.
Elements that make it up
PED = point of dynamic equilibrium
- F. = Fixed costs F. = Fixed investment V. = Variable investment RESI = Return on investment% ISU = Percentage of taxes on profits% CM = Percentage of marginal contribution M.V./V = Proportion that keeps the variable marginal investment, with sales.
1. Fixed Costs for the period
Fixed costs are called period or time costs because they are incurred over time.
Another name for fixed costs is constant or auxiliary or support costs.
They are those costs that remain fixed regardless of the volume of production to maintain the sales and administration functions during a certain period; as it cannot be deferred, it should be charged as an expense for the accounting period in which it is incurred, subtracting it from income.
Fixed costs representing depreciation expenses are referred to as sunk costs in contrast to fixed cash out-of-pocket costs, such as a director's salary and rental expenses.
2. Average Fixed Investment (Fixed Assets)
In addition to the minimum fixed sums of cash, accounts receivable and inventory, which are known by the name of liquid or realizable or current assets, the company needs fixed asset items such as, for example, machinery and equipment, buildings, land and other kinds of property in order to physically or materially create your product output. During the budget period, this amount of capital remains fixed even if there are changes in the volume of sales, as long as the planned activity does not require the acquisition of additional equipment or other assets for its production.
In calculating the return on investment from the sale of different products, you must find a way to allocate a portion of this fixed investment to the various product lines. In determining product scabs, a similar measure will need to be taken to allocate fixed costs to different product lines. The method of assigning these fixed investment fractions to product lines can be done by employing machine-hour types or any other method that allocates capital in proportion to the intended use and value of the facilities that were used in the projection of cost data.
3. Average Variable Investment
In addition to the fixed investment, the company needs a continuous circulation of realizable or liquid assets such as cash, accounts receivable, inventory in order to support and support increasing sales levels. As the company manufactures and produces more products, its inventories will increase, which, in turn, will become accounts receivable, and then cash. Current or current assets are financed mainly with current or short-term liabilities, that is, with short-term credits that are classified as accounts payable. The difference between current assets and current liabilities is the working capital or variable investment.
The variable investment is the measure of the ability of the company to quickly pay its outstanding debts.
4. Desired return on investment
Return on investment has been used for many years in banking and other financial activities to measure performance.
Return on investment (ROI) is used to make comparisons between competitive short-term projects to determine which is the most favorable investment.
Also, return on investment can be used as an effective planting technique as well as a control technique.
Return on investment is calculated by dividing the controllable profit of the investment center by the controllable assets of the investment center.
The return on investment would be expressed:
Controllable utility
RSI =
Controllable assets
5. Percentage of Taxes, PTU and Reserves
TAXES.- The Tax Code of the Federation mentions that taxes are the contributions established in the Law that must be paid by natural and legal persons who are in the legal or factual situation provided by the same and that are different from the contributions of social security, improvement contributions and rights.
Among these are the Income Tax (ISR) applying a rate of 34% to the tax result from capital, work or a combination of both, another is the Value Added Tax (VAT) paid by people who do the following acts or activities:
- Dispose of goods, Provide independent services, Grant the temporary use or enjoyment of goods, Import goods and services applying a rate of 15%, one more is the Asset Tax which will be determined by applying the 1.8% rate to the asset value
Employee Profit Sharing (PTU). The Political Constitution of the United Mexican States mentions that workers will have the right to a share in the profits of the companies. In this regard, the Federal Labor Law indicates that workers will participate in the profits of the companies, in accordance with the percentage (10%) determined by the National Commission for the participation of workers in the profits of the companies.
RESERVES.- Part of the profits that are set aside to create a fund and with it, face future eventualities or strengthen the entity's equity.
Legal Reserve.- That which, in accordance with the provisions of the General Law of Mercantile Companies, is separated annually from net profits, at least 5%, until a fifth of the capital stock is imported. This fund must be reconstituted in the same way when it decreases for any reason.
Credit institutions must apply 10% of profits to the reserve, up to the amount that equals the paid-in capital.
Insurance and surety institutions must apply 10% of profits to the reserve, up to an amount equal to 50% of the subscribed capital stock.
6. Marginal Contribution Percentage (Average)
It is that percentage that results from dividing the total marginal contribution between the sale price of either a single item or several, this margin also results from reducing the variable costs of the evaluated period to sales.
We can also say that it is Net profit necessary to cover the costs incurred and it also implies a profit.
7. Variable Marginal Investment Percentage based on Sales
The percentage of Variable Marginal Investment is that index that is obtained by taking into account the reciprocal of the rotation of Inventories, Accounts Receivable and Accounts Payable of the company, in order to include these elements within the analysis that have an impact on the sales of the organization, and have greater certainty that the various factors that are involved in income will be taken into account, for this reason this percentage is the part of sales that is related to this investment index Marginal variable, since they are changing data, according to the operations of the negotiation.
Formula development
Dynamic Balance Point
CAPITAL REQUIREMENTS
+ VARIABLE INVESTMENT
+ FIXED INVESTMENT
+ VARIABLE MARGINAL INVESTMENT
= TOTAL INVESTMENT X RESI = RETURN ON INVESTMENT
CALCULATION OF THE VARIABLE MARGINAL INVESTMENT INDEX
Example
The company GONMAR, SA de CV, wants to know the sales necessary to reach The Dynamic Equilibrium Point, considering an investment on which it wants to obtain a 35% return, for which it provides the following information:
- CF 1'000,000
| • | IF | 10'000,000 |
| • | IV | 400,000 |
| • | RESI | 35% |
| • | % ISU | fifty% |
| • | % CM | 30% |
| • | IMV / V | 25% |
| FORMULA |
(IF + IV) RESI CF +
100 -% ISU
PED =
IMV / VX RESI % CM -
100 -% ISU
(10'000,000 + 400,000) 0.35
1'000,000 +
1.00 - 0.50
PED =
0.25 X 0.35
0.30 -
1.00 - 0.50
1'000,000 + 3'640,000
PED =
1'000,000 + 7'280,000 8'280,000
PED = =
0.30 - 0.175 0.125
- ED = 66'240,000.00
CHECKING THE DYNAMIC BALANCE POINT
CAPITAL REQUIREMENT
VARIABLE INVESTMENT 400,000 + FIXED INVESTMENT 10'000,000 + VARIABLE MARGINAL INVESTMENT 16,560,000
(66,240,000 x 0.25)
= TOTAL INVESTMENT
X RESI
PERFORMANCE ON
= INVESTMENT
DETERMINATION OF THE INVESTMENT
DETERMINATION OF VARIABLE MARGINAL INVESTMENT ON SALES
DETERMINATION OF THE AVERAGE TOTAL INVESTMENT
RETURN ON INVESTMENT
Pre Pre Feasibility Assessment of Investment Projects
What is an investment project?
It is a proposal for action that requires the use of a set of human, material and technological resources; since it seeks to obtain profitability and utility…
An Investment Project ranges from the Intention or Thought to “execute something”, until the end or normal operation.
Some objectives in the evaluation of investment projects
- Make decisions on objective - realistic bases. Prevent “losing” projects from being disguised as winners Reduce the chances of facing unpleasant surprises. Analysis based on Marginal Contribution to discard or not investment projects. It constitutes an element of Long-Term planning Manage Each project as an economic-financial entity Provides Management by Areas of Responsibility It is a necessary instrument for obtaining financing It helps to define prices It enables Budget Control and Management
Stages in the evaluation of an investment project.
- STUDY OF PRE-FEASIBILITY. At this stage, a more in-depth evaluation of the viable alternatives is carried out, and the goodness of each of them is determined. Conception of the project, diagnosis and analysis of the environment and detection of needs. In this stage the recommended alternatives are perfected and generally based on the information collected. MARKET STUDY. This includes: Demand analysis, Supply analysis, Price analysis, Marketing analysis, TECHNICAL STUDY. Includes the analysis of: plant size, location, distribution, project engineering and organization. FINANCIAL ECONOMIC STUDY. This stage includes: cost estimation, Human Resources, Advances and Deposits, Impact of contributions, initial investment, working capital, Financing,Cash Flow and Pro forma Financial Statements. FINANCIAL ECONOMIC EVALUATION. It includes the revision of the Net Present Value,
Internal Rate of Return and Sensitivity Analysis.
Investment project evaluation methods.
- Number of Recovery Periods:
Investment Amount
Net Cash Flows by Period
- Average Accounting Profit Rate.- (After ISR and PTU).-
Net Profit x 100 Investment
- Comparison Values at a certain date:
Amount (M) of disbursements (D) calculated at a rate from the date of disbursement to the start or completion of the project.
M = D (1 + i) n
Current or present values (VP) of future income (IF) brought in at the start or completion date of the project.
VP = IF
- Profitability definition when comparing the two previous points.
VP - M = + Utility
- Lost
Dynamic balance point
Inductive Process.- Starting from an investment, from the profitability that you want to obtain in a period and differentiating the costs and expenses into fixed and variable, determine the income necessary to achieve said postulates
Internal rate of return
(TIRR.- Internal Rate of Return. IRR).- It is the rate at which the Present Value of future income coincides with the amount of the current investment or what is the same "The interest rate that equals the present value of the expected future cash inflows, with the initial cost of the disbursement. Conclusions
As discussed in the development of this topic, it is of utmost importance to determine the balance point in any type of organization, but now taking into account the capital investment, that is, the assets that the organization has and all those investments that affect the course of the operations of the company, in order not to exclude any element that affects or has repercussions within the organization when determining the necessary sales so that it is not lost or won and from this point know from what moment you can start to earn or you are in danger of losing.
In order to achieve the above, in addition to including all those investments that the company has, it is also necessary to know, as in the Traditional Balance Point, the Fixed Costs that the business is expending within the period to be evaluated, together with this the Marginal Contribution that you have, The Percentage you want to obtain on the investment that has already been made, the Percentage of Taxes that is estimated to be paid in relation to sales and a percentage that can vary on the marginal investment based on sales, all This in order to obtain the Dynamic Balance Point of the period considering the capital investment, its performance and taxes, and with this make correct and well-founded decisions.
Information sources
- Spencer A. Turker. The Equilibrium system, Hermes Hermanos, Mexico, PP. 29-30, 126-135 Charles T. Horgren. Cost accounting. A management approach. Editorial Prentice-Hal Inc. México, PP. 69-70 Ralph Polim, Frank Faboze. Cost Accounting, concept and applications for managerial decision making. Second edition, Editorial Mc Graw Hill Interamericana Editores, México, 1989, PP. 766-777 http://www.angelfire.com/pa/YOUNGSPERU/proyecto.doc Date: 09/20/03 19:38 pm http://www.cboe.com/Spanish/Resources/glossary.asp#A Date: 09/20/03 20:05 pm Alva Estevez Rafael. Investment Project Evaluation Course. CMIC, Nov. 2002
