Question 3

Price/quantity index
Advantages Facilitates comparisons. Enables analysis of percentage or relative changes rather than absolute changes. Disadvantages There are many types of index number. Which to use depends on circumstances. Loss of information. One figure represents a mass of data.

Simple aggregate price/ quantity index

Disadvantage The value of the index does not depend on the number of items used or on the quantities chosen to quote the price in.

Simple average relative price/quantity index

Disadvantages: Assumes all goods have equal importance although we do not spend equal amounts on all items.

Laspeyres versus Paasche Index

When is Laspeyres most appropriate and when is Paasche the better choice? Laspeyres Advantages Requires quantity data from only the base period. This allows a more meaningful comparison over time. The changes in the index can be attributed to changes in the price. Disadvantages Does not reflect changes in buying patterns over time. Also, it may overweight goods whose prices increase. Paasche Advantages Because it uses quantities from the current period, it reflects current buying habits. Disadvantages It requires quantity data for the current year. Because different quantities are used each year, it is impossible to attribute changes in the index to changes in price alone. It tends to overweight the goods whose prices have declined. It requires the prices to be recomputed each year.

Composite index
advantages A composite index provides opportunities for index covering. Is a good way to enforce the uniqueness of multiple attributes. disadvantages Composite indexes tend to have large entries. This means fewer index entries per index page and more index pages to read. An update to any attribute of a composite index causes the index to be modified. The columns you choose should not be those that are updated often.

Question 4

Breakeven analysis Breakeven analysis is the relationship between cost volume and profits at various levels of activity, with emphasis being placed on the breakeven point. The breakeven point is where the business neither receive a profit nor a loss, this is when total money received from sales is equal to total money spent to produce the items for sale. It focuses on business volume as the prime consideration in planning and decision-making such as:
Effect of production method change Effect of price changes on profits Viability of special sales promotion campaigns Effect of changes in product mix

Uses of a breakeven analysis

Measure profit and loses at different levels of production and sales. To predict the effect of changes in price of sales. To analysis the relationship between fixed cost and variable cost. To predict the effect on profitability if changes in cost and efficiency.

The Break-Even Chart

In the diagram, the line OA represents the variation of income at varying levels of production activity ("output"). OB represents the total fixed costs in the business. As output increases, variable costs are incurred, meaning that total costs (fixed + variable) also increase. At low levels of output, Costs are greater than Income. At the point of intersection, P, costs are exactly equal to income, and hence neither profit nor loss is made.

Fixed Costs Fixed costs are those business costs that are not directly related to the level of production or output. Examples of fixed costs: Rent and rates , Depreciation

Variable Costs Variable costs are those costs which vary directly with the level of output. They represent payment output-related inputs such as raw materials, direct labour, fuel and revenue-related costs such as commission.
Semi-Variable Costs Whilst the distinction between fixed and variable costs is a convenient way of categorizing business costs, in reality there are some costs which are fixed in nature but which increase when output reaches certain levels.

Example
A company currently sells 20,000 units at a unit selling price 0f RM5.00. The variable cost of each unit is RM3.00. Fixed cost for the period is RM30,000. The break-even point is: 30 000 15 000units 2.00 The company wants to make a profit of RM20,000 for the following period. Units should the company sell to earn profit: Fixed cost + Profit Number of units Contribution per unit
RM30 000 + RM20 000 25 000units 2.00

Application of break-even analysis

The break-even point is one of the simplest yet least used analytical tools in management. It helps to provide a dynamic view of the relationships between sales, costs and profits. For example : Expressing break-even sales as a percentage of actual sales - can give managers a chance to understand when to expect to break even (by linking the percent to when in the week/month this percent of sales might occur). The break-even point is a special case of target income sales, where target income is 0 (breaking even). This is very important for financial analysis.

Limitations of Break-even Analysis

Although break-even analysis is a very useful risk assessment technique and a useful device for testing the sensitivities of business performance, the following limitations must be consider: All costs resolved into fixed or variable Variable costs fluctuate in direct proportion to volume. Fixed costs remain constant over the volume range. The selling price per unit is constant over the entire volume range. The company sells only one product, or mix of products tends to remain constant. Volumetric increase is the only factor affecting costs. The efficiency in the use of resources will remain constant over the period.

Question 5