On Your Bike has made the following forecasts for the costs and sales of its bikes for 2021 - Edexcel - GCSE Business - Question 5 - 2020 - Paper 1

Profit can be calculated using the following formula:

$Profit = Total\ Revenue - Total\ Costs$

Where Total Costs include Variable Costs and Fixed Costs:

1. Calculate the Total Variable Costs:

   • Total Variable Costs = Variable Cost per Bike × Total Number of Bike Sales
   • Total Variable Costs = £350 × 2,000 = £700,000

2. Then calculate Total Costs:

   • Total Costs = Total Variable Costs + Fixed Costs
   • Total Costs = £700,000 + £150,000 = £850,000

3. Now, we can determine profit:

   • Profit = £1,100,000 - £850,000 = £250,000

Therefore, the profit On Your Bike is forecast to make from selling bikes in 2021 is £250,000.

Reducing costs can significantly impact On Your Bike, particularly in terms of its break-even analysis.

1. Lower Fixed Costs: If fixed costs are reduced (e.g., by negotiating lower rent or utility costs), the break-even point decreases, allowing the company to become profitable at a lower sales volume.

2. Lower Variable Costs: Reducing variable costs (e.g., through bulk purchasing of materials or optimizing production processes) can increase the profit margin per bike sold. This refinement again lowers the break-even level as fewer sales are needed to cover costs.

3. Strategic Implications: While cost-cutting can improve profitability, it's essential that the quality of products or services is not compromised, as this might lead to a reduction in sales volume. On Your Bike must balance between cost efficiency and maintaining customer satisfaction so that sales targets can still be met.

4. Overall Financial Health: A lower break-even point improves and stabilizes the company's financial health, making it a more attractive option for investors and enabling potential re-investment into the business for expansion or improvement.

In summary, reducing costs can effectively lower the break-even level of output, allowing On Your Bike to achieve profitability more easily. However, it is crucial to approach cost reductions strategically to ensure long-term sustainability.