3.2 Break-Even Point (BEP) Analysis of a Parasailing Company

 

A developing parasailing company has operational calculations mainly based on the number of flight basis.  The number of flights is really needed to be considered as a very important aspect of the break-even point calculation.

The calculation of break-even point of every company in general can be defined by the following formula (Walter and Shousen, 2009): 

Break-even point in units = total fixed cost / contribution margin per unit = fixed cost / (sales per unit – variable cost per unit) ………… (1)

Break-even point in sales = total fixed costs / contribution margin ratio ………… (2)

And the so called contribution margin can be defined as,

Contribution Margin (CM) per unit = Sales Revenue per unit – Variable Costs per unit ………………………….. (3)

CM ratio per unit = (Sales Revenue - Variable Costs) per unit/ Sales Revenue per unit………………………….. (4)

To proceed with the break-even calculation based on the above formulas, the required inputs are variable and fixed costs. Therefore, other than The Sales revenue per flight consisting of

1.     Sales price with the amount of $175 / flight , and

2.     Total sales revenue per flight  : $ 175 / flight,  

We also need to classify available data of our parasailing company to be between variable or fixed ones.

Variable costs (any expenses that we can control or anything that can be bought in a store ((Posner, n.d.))):

-        Fuel costs per flight (Battles, 2003) : $100 / flight

-    The boat crew with the amount of $30  / flight,

-    Total Variable Cost : $130 /flight

Fixed costs (any expense that does not change from period to period (Posner, n.d.)):

1.     Loan payments per month (Posner, n.d.) : $350

2.     Full time scheduler salary per month (Team, 2021) : $2,500

3. Dock fee and use of a small office on a pier Per month (Posner, n.d.) : $500
4. Total fixed costs : $350 + $2,500 + $500 = $ 3350 / month

Based on the available input, the calculation of break-even point (BEP) of the year 1 assuming the company has well – reputed name without the need of referrals fee can be done  by referring to equation …(1) and …(2) using the following ways,

Break-even point in units of flight = Total fixed cost / contribution margin per unit

= Total fixed cost /[sales revenue/unit – variable cost/unit] ………… (1)

                   = [$ 3350 / month] / [($ 175 / flight)-($130 / flight)]

= 3350 /45 flight/month

= 74.44 flight /month

≈ 74 flight / month in year 1

Break-even point in sales = Total fixed costs / contribution margin ratio ………… (2)

     = [$ 3350 / month] / [{($ 175 / flight)-($130 / flight)}/{($ 175 /    flight)}]

     = $ 13027.78 per month in year 1 

In the calculation of the break-even point of year 2 assuming the market becomes fluctuated and needs the assistance of reference or marketing agent causing the referral or marketing fees, we need to little bit change the conventional one to be the contribution margin after marketing (CMAM) by using the following formula (CFI, 2020),

CMAM = sales revenue – variable costs – marketing expense …………………………….. (5)

CMAM ratio = (sales revenue – variable costs – marketing expense)/sales revenue ………. (6)

 

Therefore, the BEP of year 2 becomes,

BEP in units of flights = Fixed cost / CMAM

= [$ 3350 / month] / [($ 175 / flight)-($130 / flight) – 2% * ($ 175 / flight)]

= 80.72 flight / month in year 2 ≈ 81 flight / month in year 2 (which is (80.72-74.44) = 6.28 ≈ 6. 3 greater in difference from the year 1).

BEP in sales = fixed cost / CMAM ratio

= [$ 3350 / month] / [{($ 175 / flight)-($130 / flight) – 2% * ($ 175 / flight)}/{($ 175 / flight)}]

= $ 14126.51 per month in year 2 which is $(14126.51-13027.78) = $1098.73 greater in difference from the year 1.

            In the year 3, assuming we still need to pay for the referral / marketing fee and requiring the profits of $10,000, the targeted units of flight and sales can be determined by adding target income with fixed costs and dividing both of them with the CMAM 

BEP in units of flights = (Fixed cost + target income) / CMAM

= [{$ 3350 / month] + $ (10,000/12)/month} / [($ 175 / flight)-($130 / flight) – 2% * ($ 175 / flight)]

=100.8 flight/month ≈ 101 flight/month in year 3 (which is (100.8-80.72) = 20.08 ≈ 20 greater in difference from the year 2)

BEP in sales = (Fixed cost + target income) / CMAM ratio

= [$ 3350 / month + $ (10,000/12)/month] / [{($ 175 / flight)-($130 / flight) – 2% * ($ 175 / flight)}/{($ 175 / flight)}]

= $17640.56 per month in year 3 which is $(17640.56-14126.51) = $3514.05 greater in difference from the year 2.

The above results may be limited due to the limited variable cost data which only include fuel cost/flight, and the cost of both crew service. Other kinds of variable cost which may be missing can be the selling, general and administrative expenses (SG&A) (Garcia, 2019) such as that of the ticket production cost, overtime bonus for the employees, accounting costs, legal costs, etc (Beaver, n.d.).

As a matter of fact, the above results of year 1 to 3 tell us that if the company keeps going in a good progress of maintaining the good sale revenues then the parasailing company will be able to exactly or even more than overcome all costs including the non-interest bank loan payments as one of the company’s fixed costs meaning that the bank should invest in the parasailing company rather than giving the loan. That way means If the company gets profit, then the bank will get profit, and if the company gets loss, the invested money from the bank has to be lost. All of them should be calculated in such a good manners and proportional way that all parties can be well satisfied, no forbidden religious rules are neglected and no usury is involved.          

 

Reference

Walter, L. M., & Skousen, C. J. (2009). Managerial and Cost Accounting (Ser. 978-87-7681-491-5). bookboon.com.

Posner, C. (n.d.). What are fixed, savings and variable costs and expenses, and how will they help me learn how to budget my money properly? My Money Coach. Retrieved September 22, 2021, from https://www.mymoneycoach.ca/blog/what-are-fixed-savings-variable-costs-expenses-and-learn-to-budget-money.html.

Battles, B. (2003, February 1). Costs come in many flavors: Variable vs. fixed. StackPath. Retrieved September 22, 2021, from https://www.aviationpros.com/home/article/10387227/costs-come-in-many-flavors-variable-vs-fixed.

Team, T. I. (2021, September 13). Do minimum wage laws make labor a fixed or variable cost? Investopedia. Retrieved September 22, 2021, from https://www.investopedia.com/ask/answers/012915/do-minimum-wage-laws-make-labor-fixed-or-variable-cost.asp.

CFI. (2020, December 7). Contribution margin after marketing (CMAM). Corporate Finance Institute. Retrieved September 22, 2021, from https://corporatefinanceinstitute.com/resources/knowledge/accounting/contribution-margin-after-marketing-cmam/.

Garcia, M. (2019, August 27). How to determine variable costs from financial statements. Bizfluent. Retrieved September 21, 2021, from https://bizfluent.com/how-12009134-determine-variable-costs-financial-statements.html.

Beaver, S. (n.d.). The costs behind selling, General & Administrative expenses. Oracle NetSuite. Retrieved September 22, 2021, from https://www.netsuite.com/portal/resource/articles/accounting/selling-general-administrative-sga.shtml.