I have given the opportunity to investigate and write a full management report on Jones Compact Cars. The firm requires my expertise in the area of management accounting; I will use my knowledge to evaluate each course of action needed to run the firm effectively. Jones Compact Cars is a small family business in rural Southgate. It was established 40 years ago and its star product is the flame red MG. The firm is not functioning efficiently and there is a lot of room for improvement.
The firm suffers from four major problems, poor marketing, internal co-ordination, personnel and the lack of production. I will investigate the above and outline the major problems to a greater degree. One of the major problems that can be seen is that the firm does not practice good budgetary control. The sales forecast is set but it is very rarely monitored and costs are poorly controlled. The firm believes that if it sells 300 cars at the price of 40 each they will break even. From using the company information, by analysing and producing a break-even chart I have found out that The firm is incorrect in its assumption that it needs to sell 300 cars per year to break even.
The actual amount that has to be sold to break even is 321 cars each month. I have illustrated this in my break-even chart that clearly shows the number of cars to break even is 321. Break even in appendix. There are several benefits of the break-even analysis, and I have used it to show how the firm is performing. Visual impact, the break-even chart provides a visual means of analysing businesses financial position at different level of output. Business decisions makers can see at a glance at the amounts of profit or loss that will make at different sales levels.
Risk assessment, the margin of safety shown on the break even chart provides business with an assessment of risk. It shows how much sales can fall before a loss is made. The chart therefore gives an indication of the businesses ability to withstand unfavourable trading conditions. Break-even analysis can also be used to consider what would have to the level of profitability if for instance price or costs were changed. E. g. if price was being considered and was actually raised by drawing a new total revenue line on the break even chart, the total amount of profit at each level of sales could easily be seen.
The impact of change in price, fixed costs and variable costs can easily be seen and plotted. The limitations of the break-even analysis The break-even analysis has a number of limitations. In particular it is sometimes criticised because certain of its assumptions are unrealistic. I have used the chart to find out how the firm is performing. Uncertain data, the precise figure of total costs and total revenue are not likely to be known over the full range of sales. This is relatively true in the long term, e. g. changes in technology, raw materials costs or market conditions might affect total costs and total revenue.
The process simplistically assumes prices are constant and cannot take these changes into account. Fixed and variable cots, the break-even analysis assumes that costs can be divided into fixed and variable costs. This is not always the case as fuel costs are generally considered to be semi-variable. They have a fixed standing charge and a variable charge that depends on how much gas and electricity is used. Another difficulty is that some fixed costs are stepped or semi fixed, e. g. if a manufacturer raises production, large premises might have to be obtained this in return will raise costs.
Different types of stepped costs such as rent, administration costs or interest payments on machinery, might have their steps at different output levels. These factors might make it difficult to construct an accurate break-even chart. Unsold production, the break-even analysis assumes that all goods that are produced are then sold. All businesses hope to sell everything that they have produced this is sometimes not the case. Some stock might become outdated, unfashionable or damaged and therefor impossible to sell. If this happens the costs of production will not relate to the number of goods sold, but to the number of goods produced.
Under these circumstances break-even analysis becomes inaccurate. Many other factors must be considered such as the accuracy of the data. A firm must be accurate with its numbers as wrong figures could project sales targets that cannot be reached. The economy could be in crisis so sales could fall, these factors are not considered by the break-even analysis. Some firm sometimes considers break-even analysis to be too simple as x amount has to be produced and sold to break even but it does not take into account all the above factors such as unsold stock and the conditions of the market.
On the basis of my calculation I would put forward the following recommendations to JCCS's. The firm must produce an accurate break-even analysis in-order to find out that the firm must sell 321 cars each month and not 300 per year to break even. The firm could introduce an effective break even analysis into to management techniques and then use it to monitor future levels of sales so they can have a ready appreciation of profit and loss for any given quantity.
At present the firm does not have a problem as they reselling more and margin of safety exists. The business is product oriented and the firm must realise that marketing needs to be effective and constantly ongoing. In order to maintain and increase sales. The firm last year set it self a sales target of 500,000 but did not manage to achieve it. This is because the market is constantly changing and children are becoming less interested in toys and more into computer games. However there appears to be marketing emerging, men aged 40-60 with a captivating interest in model cars.
The firm must take advantage of this interest in cars by effective marketing and segmentation in order to attract these potential sales. As the market is dynamic the firm needs to focus a lot more on its marketing and the new age who are interested. Also to overcome the above the firm could introduce constant monitoring of sales and its customers. I have also analysed the variances as it states JCC does not practice good budgetary control and very rarely monitors them. Costs are appearing to be poorly controlled and all this has a major affect on the way a business performs. I have produced the following variance analysis.