SEU Determining the Financing Mix and Break Even Analysis Discussion
Coffee Shop Break-even Analysis Break-even analysis is a calculation used to determine the amount of revenue needed for a project or endeavor to at least cover all of its operating costs. At the point of break-even, the project or business is neither making money nor losing it (Martin et al., 2006). As the business owner, I can use break-even analysis as the owner of the coffee shop to determine whether or not it will be profitable and worthwhile to operate a second location in the city. By figuring out the break-even point, I may determine how many cups of coffee must be sold at the new location for all expenses to be covered. If the projected sales volume at the new location is higher than the break-even point, it shows that growth may be financially feasible. There are various factors to consider before starting a break-even analysis. The business owner should first assess the demand for coffee in the proposed second site. Additionally, the local competition should be evaluated to comprehend how the coffee shop may set itself apart. Moreover, the business owner should assess whether the new location can maintain the same level of operational effectiveness as the first one. The business owner should also consider whether expansion will enable the company to take advantage of economies of scale, thus lowering costs. Furthermore, any seasonal variations in sales that might affect the break-even calculations should also be taken into account. Various assumptions should also be made before starting a break-even analysis. Jakupi (2017) asserts that business owners should analyze all of the possible risks and uncertainties associated with the expansion before making a choice. The first assumption is that the company can continue to provide customers with the same level of quality and service at the new site as it does at the current one. Another assumption relates to the potential revenue the business can 3 make at the new site. These must be based on market analysis and data collected prior to the current time. The business owner should also assume that the selling price will remain the same unless he or she has other intentions to change it in reaction to market conditions. A further assumption that should be made is that there will not be any significant setbacks that could harm the business. The break-even analysis can then begin once all the relevant variables and assumptions have been taken into account. The initial step comprises calculating the overall fixed costs related to launching and maintaining a second site. Total fixed costs are defined by Martin et al. (2006) as operating or production costs that remain constant regardless of output. Finding all production-related variable costs is the next stage. Total variable costs are operating or production costs that fluctuate based on output. This accounts for all costs that fluctuate based on the production volume, such as labor, milk, coffee beans, baked goods and trash cup costs. The third step involves calculating the expected sales revenue. Comparing the anticipated monthly or yearly sales revenue to the break-even point is also essential. According to Sintha (2020), the expected sales income can be subtracted from the total fixed costs and total variable expenses to determine the break-even point. If revenues are more than this threshold, the company will be profitable; if not, it will experience losses. The business owner can be confident that adding a second site will be successful if the break-even threshold is lower than the projected sales income. Thus, the owner can reassess the presumptions and determine whether or not to move forward with the expansion if the break-even threshold surpasses the anticipated sales revenue. 4 References Jakupi, S. Z., Statovci, B., & Hajrizi, B. (2017). Break-Even Analysis as a powerful tool in Decision-Making. International Journal of Management Excellence (ISSN: 2292-1648), 9(3), 1169-1171. https://doi.org/10.17722/ijme.v9i3.940 Martin, J. D., Scott, D. F., Petty, J. W., & Keown, A. J. (2006). Foundations of finance. Pearson Prentice Hall. Sintha, L. (2020). Importance of Break-EVEN analysis for the micro, small and medium enterprises. International Journal http://repository.uki.ac.id/id/eprint/2044 of Research-GRANTHAALAYAH, 8(6).
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