Chapter 13

PRACTICAL APPROACH TO THE BALANCE ANALYSIS

The balance analysis defined as a point of profit equal to zero constitutes an important element of planning in the short term because it allows us to calculate the smaller quota or minimum of units to produce and sell for a business that does not produce a loss. It is important to correct the use of this tool knowing the limitation of the model.

Clearing the equation:

Graphically:

2. BASIC ASSUMPTIONS

a. The costs are perfectly definable like fixed or variable.
b. Variation of costs and income according to a linear function: y = mx+b
c. The sale price is constant. 
d. Production = cash sale
e. Production of goods of a single type.
f. Short term to assume that costs are fixed.

3. CRITIC

A. In practice is very complex to classify the costs as fixed or variable. Still, in the short term, very few headings can be differentiated as perfectly fixed because all the costs change based on time, especially in an inflationary economy in regard to technological change, the improvement of systems, etc.

C. The curve of income by sales presents a behavior with slopes based on the offered volume and discounts, which practical very common in the businesses when the plant isn't full. As far as the raw materials, usually, we find changing prices based on the amounts bought. Then, a linear behavior curve happens with variable angles (A, B, C, etc.) depending on the amount to buy or to sell according to the case; not always the trade is in cash.

F. Generally, the businesses are constituted with an indefinite life and for that reason, the administrators cannot concentrate at the moment; they must think about the long term, being these most difficult aspects to handle, because it demands a great quota of forecast, responsibility, and sacrifice of present results. Decisions like the system of depreciation to use, the retention of profits, the investment in publicity, the system of valuation of inventories, the motivation and training of the personnel, the refreshing of equipment, the transfer of a plant, etc., are good examples to illustrate as it is possible to be sacrificed the future of the company for an immediate result. 

A. CLASSIFICATION OF COSTS: for each company individual the careful qualification will become, after a process of discussion and analysis of each of the headings, processed by experts and with a vast knowledge of the business, try to look for the most approximate possible classification in order that one keeps the objectivity and the agreement with the system of costs of the company. In case of doubt, the behavior of the heading is due to deciding on an alternative and verifying it in order to perfect the system.

B. VARIATION OF COSTS AND INCOME: each article is due to be studied the optimal order of production, to determine the consumption average of each of the direct incomes. The orders of raw materials must take control based on the optimal size and as far as possible, to negotiate the price for a reasonable time and if it is not obtained it, is recommended to consider a price average based on experience; the manual labor, hiring based on produced units would be desirable, it must almost unavoidably, consider the heading as fixed and to consider the value of unit produced including the appropriations for social benefits considering the labor legislation and the collective conventions.

C. SALE PRICE:  to calculate the net sale price based on discounts and the cost of capital of the company. I use price differentials, to define the corresponding curve of income adding the income by tributary stimuli if there is, and considering the date of the income according to the legal rule to calculate the average price.

D. RATE OF PRODUCTION AND SALES: to balance this factor it is required to have presented the financial expenses. In the case of finished product storage, the functions of production and sale must be correlated, and affect the surpluses by the cost of capital of the company.

E. PRODUCT MIXTURE: the use of a representative product like a conversion unit is recommended to look for a factor of equivalence for other articles. Of this form, it expresses the mixture of production based on that unit. The fixed costs are assigned according to the system of costs that uses the company. 

5. POINT OF FINANCIAL BALANCE 

Example: BALANCE POINT

An equal part of a profit to zero

Sale price =1 99.19
Fixed costs = 175.000.000
Variable costs = 20%

Variable costs in pesos 40
Q = 175,000,000/(199,19 - 40)
Q = 1.099.315 units/year

Example: POINT OF REVIEWED BALANCE (josavere)

Term at 2 months
Reviewed sale price = 199.19 x 0,9565 =190.525235

FINANCIAL COST

% of C.V. = 41.41/190.53

% of C.V. = 22%

Q reviewed = 175,000,000/(200,03 - 41,44)

Q reviewed = 1.173.586 units/year