Assignment Requirements

 

Agree or disagree with the attached

Business whether local or global is dependent on the accurate decision making of its managers, if it is going to be successful. There are two analytical tools that managers can use to support and drive their decision making, and they are marginal and breakeven analysis. These tools are this week’s topic.

Marginal analysis and the costs that are considered when using it?

Marginal analysis is a tool that is used by companies to help make decisions, it focuses on the variability of cost and revenue but not on fixed cost, (Atrill and McLaney, p.81, 2012), Collis and Hussey, (2007, p. 292) describe variable cost as is ‘an item of revenue expenditure that varies directly with changes in the level of production or sales activity,’ (Collis and Hussey, 2007, p. 292). Marginal analysis does this by analyzing the benefit of additional activity (marginal benefit), in relationship to the cost of that activity (marginal cost), (Morey, 2010). The cost that is considered by managers when using marginal analysis is the marginal cost. This use of marginal analysis enables firms to make decisions regarding activities such as increasing production of a product, the analysis will tell them what the value of that will be. My thoughts are that a margin analysis can also highlight the business drivers and identify where there are issues within the business. According to Atrill & McLaney (2012, p. 82), there are four main areas that use marginal analysis. for decision making, and they are; assessing and pricing opportunities for contracting, the best way to use scarce resources, deciding whether to make or buy and whether to continue or close decisions.

Breakeven Analysis

Breakeven analysis is used to identify the breakeven point; this produces information for managers. The breakeven point according to Collis and Hussey, (2007, p. 292), “is the level of activity where there is neither profit nor loss, as measured by volume of production or sales, percentage of production capacity or sales revenue” (Collis and Hussey, 2007). Therefore, the breakeven point is where the whole contribution is equal to the total of the fixed costs or total revenue which equals the total costs.” Collis and Hussey, (2007, p. 292). Breakeven analysis can be used by managers for setting the minimum selling price and levels of activity it also facilitates managers to identify the level of activity that would be required to generate profit it also calculates the margin of safety for a specified level of activity.

 

Compare and contrast the use of marginal analysis and break-even analysis for evaluating business decisions.

What we see with these analytical tools are the following; their purposes are slightly different in that marginal analysis facilitates managers in making short-term decisions whereas breakeven analysis facilitates long-term planning. I think that marginal analysis is useful as it appears to enable managers to reevaluate and identify areas where change is required. I also see it more as a current state tool which supports the long term plan.

When considering cost marginal analysis analyzes the variable costs unlike breakeven analysis which focuses on fixed cost and makes the assumption that the costs, or anything else such as political or organizational stability will not change. However, this does give managers the ability to predict a financial outcome. Marginal analysis focuses on an activity is a specific and its variables, breakeven analysis that focuses on the whole. My thoughts are that marginal analysis focuses on the microeconomics whereas breakeven analysis looks at the macroeconomics as described by, Johanson, (2005).

Conclusion

Marginal and breakeven analysis are useful tools for any manager business. While being similar in nature they do have a different focus. My thoughts on this are that, individually they have their role, but together they form a powerful analytical tool to deliver detailed information on the full picture.

 

Louise

References:

Atrill, P. and McLaney, E.. (2012) Management Accounting for Decision Makers. 7th ed. Harlow, England: Pearson Education Ltd.

Collis. J,  and Hussey, R.. (2007) Business Accounting: An Introduction to Financial and Management Accounting. Palgrave Macmillan. The Cromwell Press Trowbridge Wilthire, p. 292

Johanson, P..(2005) A Glossary of Political Economy Terms. [Online] Available at: (Accessed 24 May 2014).