Demand Uncertainty, PMS, Incremental Value of Demand, and Tax Analysis

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8. BREAK EVEN ANALYSIS
8.1 Demand Uncertainty
Demand uncertainty is a critical component for every business start-up. Breakeven analysis was used to determine the 5 year demand as well as the incremental value of demand for the primary product (IV of P1, where p1 =primary product). The IV demand for combined products (IV+p1+p2+p3) was also ascertained. The PMS for P1 and combined products was used to calculate demand projections for the 5 year period.
In determining the Break-even point, a 5 year demand forecast for P1 was computed. The five year demand projections for P1 were then used to determine the incremental value (IV) of P1. The values obtained were then used to plot an IV demand graph for P1. The graph was generated by plotting IV demand of P1 values against P1’s 5 year demand projections.
The point of intercept was obtained by the formula: Y= 195.2x-472860.
The projected incremental demand (IV) of P1 is about 2400 at an incremental value of 468, 750.
The Break Even Point (BEP) = Fixed Operational costs + net startup costs + opportunity costs/UCM
Thus the projected BEP is 2,422;
Point of intercept = (Fixed operational costs + Net startup costs + opportunity costs) = -472,860
Slope = Unitcontribution margin (UCM) = Price – unit variable cost = 195.20.
Operating Leverage = Fixed costs/ (Fixed costs+variable costs) = 1.00
Margin of safety (MS) = current demand –BEP = 578.
Percentage margin of safety (PMS) = MS/Current Demand = 19.26%
Degree of operation (DoL) = 1/PMS = 5.1921
8.2 Percentage Margin of Safety (PMS)
In a new business startup, Percentage Margin of Safety (PMS) for the Primary product (P1) is important in determining consistency in demand projections. PMS was determined by dividing the Margin of Safety (MS) by the Current Demand;
PMS = MS/Current demand = 225,240/11,694.70 = 19.26%
Therefore, Percentage of Margin for P1 is 19.26%.
8.3 Impact of Adding Secondary Products on PMS
Break Even Analysis for combined products was determined. This was important in determining the impact of adding secondary products on PMS. Thus Break Even Point (BEP) for the entire business was determined. The IV business revenue was calculated by plotting the projected 5 year demand for the combined products (IV of P1+P2+P3) against the projected incremental value of P1+P2+P3. An IV business revenue graph was generated.
The Impact of adding secondary products on the PMS was obtained as follows
Percentage Margin of Safety (PMS)=Margin of Safety (MS)/Current Revenue =32.26%;
The difference between the two PMS’s, the PMS of the primary product (P1) and that of combined products was ascerta...