Break Even Analysis and Contribution per unit (#Poll2Learn : 7 & 8)

I have started #Poll2Learn series where we will learn together by poll and explaining my point of view . You are welcome to correct me or provide your input .
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The correct answer for #Poll2Learn :7 is reward the salesperson with promotion because he is not just smart salesperson but also knows finance and work betterment of his organization.

Surprised, you will surprise more for the correct answer of #Poll2Learn :8 , the correct answer is loss very much likely to decrease.

How is the Josh ???

I do not have any accounting background but I will try my level best to explain. To check if you understood the concept correctly I will ask #Poll2Learn :9 after this article.

To understand correct answers you will have to understand the following concepts, I would recommend to learn these concepts in details from other websites and Youtube videos.

• Fixed Cost
• Variable Cost
• Contribution (per unit or Margin )
• Break-Even Point

Variable costs vary based on the amount of output, while fixed costs are the same regardless of production output. Examples of variable costs include labor and the cost of raw materials, while fixed costs may include lease and rental payments, insurance, and interest payments.

Contribution is Contribution of each unit toward organization bottom line (Profit).

Contribution = Selling price per unit - Variable cost per Unit 

Break-Even Point = Total Fixed Cost / Contribution 

Now came to #Poll2Learn :7 

The following diagram shows details of 3 different companies A, B and C

All 3 companies has different contribution per unit and different break-even point to go in profit if sales at 600 even though the total fixed cost is the same.

Total cost(fixed+ variable) per unit is 500 , if all these companies start selling below the current total cost 500, assume 450 

Will they ever able to break even after selling below cost ? 

Lets check 

Surprisingly, they can still break-even even after selling below cost price. However, these time break-even quantity is increased by 50 to 100% for A , B and C.

In nutshell, the company can make profits if Contribution is positive however, they will have to play volume game.

Let's assume in our poll 50k quantity has positive Contribution of Rs 200 per unit even at the low price of 450 then our smart salesperson did the smart deal, if Contribution is negative at that price then we could have fired him.
This strategy will reduce net profit margin but can be applied in recession time or bad time for company.

Now move to #Poll2Learn : 8 

We already know that if Contribution is positive then profit increases 

What about the loss-making company?

You can see initially loss of 8 lakhs but after selling an additional 500 Units @ 440 ( below the existing cost of 500), loss of organization reduced by 95k instead of most of you expected increase in loss .

Stock Valuation :Twitter Poll 6 #Poll2Learn

I have started #Poll2Learn series where we will learn together by poll and explaining my point of view . You are welcome to correct me or provide your input .
Follow me on twitter to participate in poll.
Follow Me  


or https://twitter.com/Value2WealthIND

#Poll2Learn : 6

Some of you might surprise to know that if we exclude dividend then high or low valuation doesn't matter if entry and exit valuation is the same. In other words, if we don't include dividend then starting (even exiting ) P/B is either 1 or 100 or 1000. Your return will be the same. But , if you include dividend then high P/B valuation stocks will give low returns.
In our case, A has P/B of 40 then starting price will be 4000 and it will give a dividend of 72 ( Dividend yield around 1.8) in the first year .
If the cost of equity capital( or expected return) is 15 then A has to give around 13.2 CAGR to meet cost or expectation of investor. A which has high ROE and the extremely good quality company, As per my calculation will give less than 10 CAGR. This time high valuation came in the picture and play its role. A has qualities almost similar to Hindustan Unilever Ltd(HUL). Maybe, you can understand why not everyone buys HUL when everyone knows it will remain quality after 10 years and will produce high ROE. 

Check CAGR of  A,B,C and D including dividend. I would like to warn these are just for illustration, no one can predict 10 years ROE. But, even if can predict in some range then half of your work is done. 

One can make good money where the scope of reinvestment with high ROE is present even though entry valuation is high and going to remain the same till exit. If entry valuation is high and it doesn't remain high then CAGR will go for a toss. No one can predict exit valuation after 10 years.

One can identify reinvestment or size of the opportunity in many ways, one of them is Bharat shah's size of opportunity framework to identify suitable companies.

Stock Valuation :Twitter Poll 5 #Poll2Learn

I have started #Poll2Learn series where we will learn together by poll and explaining my point of view . You are welcome to correct me or provide your input .
Follow me on twitter to participate in poll.
Follow Me  


or https://twitter.com/Value2WealthIND

#Poll2Learn : 5

We will try to learn valuation in the next few polls. If we calculate valuation based on book value then option C "10 years ROE 35 and DD 30%"  is the clear winner " . But, if we include expected dividend and the market is giving the same valuation for all 4 stocks ( practically not possible) then there is a good fight between option A,B and C , if assume the simple valuation of P/B of 1 (entry and exit) for each stock. If we consider dividend re-investment then option then A will be the winner.

Everyone knows the obvious better quality stock but when we put price/valuation then it is doesn't remain that much easy . Next Poll, we will put some valuation and check which one is better when the valuation was put into the picture.