Single limiting Factor Profit Maximization

Single limiting Factor Profit Maximization

Single limiting factor means there is only one constraint. Profit can be maximized with single limiting factor by maximizing the total contribution. Maximization of contribution involves three steps.

1.    Maximizing Contribution

Maximum contribution may be attained by achieving maximum contribution from the use of scarce resources i.e. utilization of resources in a way that those resource would provide maximum contribution.

2.    Priority Ranking

Product should be ranked to attain maximum contribution from the scarce resource. The ranking should be done on the bases of contributing earned by product in relation to scarce source i.e. contribution/scarce source.

3.    Production on bases of ranking

Organization should product the product on the bases of priority ranking. It means the product has fist ranking should be produced first, and if scarce resource are still available then 2^nd product should be produced. Production will go on unless all scarce resources are utilized.

Concept of Limiting Factor

Concept of Limiting Factor

Limiting factor is factor which put a limit to production activity. Organization would love to produce to meet it customer demand for profit maximization. However, due to limiting factor it would not be possible.

Example of Limiting Factor

Examples of limiting factor are shortage of labour, shortage of material, shortage of machine hours.

Limiting Factor Types

Limiting factor can be categories into single limiting Factor & multiple limiting factors. In case of single limiting factor, there is only one constraint, while in case of multiple limiting factor, there are number of limiting factor which exist at same time.

Limiting Factor identification

Limiting factor situation can easily be identified with simple budget techniques i.e. how much resources are available against how much resources are required. The next step is to identify the number of limiting factor i.e. whether a single limiting factor or multiple limiting factor.

Advantages of Break Even

Advantages of Break Even

1.    Simple

Break even is based on the simple mathematical formula. it is very easy to calculate & understand the calculation. Break even does not involve any complex mathematical or financial calculation.

2.    Basic Decision tool

Break even analyses provides one of the key fundamental information i.e. no profit no loss situation. Many businesses especially in case of new investment are interested in this information. Every business take time to provide desired return, therefore management is interested to cover its costs in early stage.

3.    Link between Volume & Profitability

Break even defines the link or association between volume and profitability. You can improve profitability, by increasing the volume of sales. Break even analyses explains very well that fixed cost can be covered only by increasing contribution.

4.    Widely Used in low stock industry

Break even is widely used in industry, where there is low stock, (produced goods are sold). Break even analyses is used as basic decision making tools by the management.

5.    Desired Profitability

Break even formula with slight change i.e. (adding profit amount to fixed cost) can also be used to determine the desired profitability volume level.

6.    Setting Price

Break even analyses explains that setting of price is very importance, because it has direct link with contribution and profitability.

7.    Variable Cost Role

Break even analyses also explains the role of variable cost in the profitability, it explains that contribution can also be increase by lowering the variable cost. It also explains that variable cost is more relevant for decision making than fixed cost.

Break Even Characteristics

Break Even Characteristics

Break even is point, where organization operates at no profit any loss. It means that it is a point, where organization covers its fixed costs. There are two basic assumption break even analyses i.e. fixed cost does not change, sale and unit variable price does not change.

1.    Fixed Cost is same

2.    Unit Variable cost will remain same

3.    Unit sale price will remain same

Break Even Formula

Fixed Cost/ unit contribution

Where;

Unit contribution = unit Sale price – Unit Variable Cost

Break Even Formula Example

Sale Price = 40

Variable Cost = 20

Fixed Cost = 80,000

What is break even point?

Solution

Unit contribution = 40-20

Unit contribution = 20

Required level     = Fixed Cost/unit Contribution

 =80,000/20

 =4,000 units