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CHAPTER 4 • THE INTERNAL ASSESSMENT 113

FIGURE 4-6
A Before and After Breakeven Chart When Prices Are Lowered
and Fixed Costs Are Increased
TR
Before After
TR
TC
BE
$
TC
VC
BE VC
$
FC
FC

Q Q

In a global economic recession especially, firms must be cognizant of the fact that
lowering prices and adding fixed costs could be a catastrophic double whammy because
the firm’s breakeven quantity needed to be sold is increased dramatically. Figure 4-6 illus-
trates this double whammy. Note how far the breakeven point shifts with both a price
decrease and an increase in fixed costs. If a firm does not break even, then it will of course
incur losses, and losses are not good, especially sustained losses.
Finally, note in Figure 4-4, 4-5, and 4-6 that Variable Costs (VC) such as labor and
materials when increased have the effect of raising the breakeven point too. Raising
Variable Costs is reflected by the Variable Cost line shifting left or becoming steeper.
When the Total Revenue (TR) line remains constant, the effect of increasing Variable
Costs is to increase Total Costs, which increases the point at which Total Revenue = Total
Costs (TC) = Breakeven (BE).
Suffice it to say here that various strategies can have dramatically beneficial or harm-
ful effects on the firm’s financial condition due to the concept of breakeven analysis.

Finance/Accounting Audit Checklist
The following finance/accounting questions, like the similar questions about marketing
and management earlier, should be examined:

1. Where is the firm financially strong and weak as indicated by financial ratio analyses?
2. Can the firm raise needed short-term capital?
3. Can the firm raise needed long-term capital through debt and/or equity?
4. Does the firm have sufficient working capital?
5. Are capital budgeting procedures effective?
6. Are dividend payout policies reasonable?
7. Does the firm have good relations with its investors and stockholders?
8. Are the firm’s financial managers experienced and well trained?
9. Is the firm’s debt situation excellent?

Production/Operations

The production/operations function of a business consists of all those activities that trans-
form inputs into goods and services. Production/operations management deals with inputs,
transformations, and outputs that vary across industries and markets. A manufacturing
operation transforms or converts inputs such as raw materials, labor, capital, machines, and
facilities into finished goods and services. As indicated in Table 4-7, Roger Schroeder sug-
gested that production/operations management comprises five functions or decision areas:
process, capacity, inventory, workforce, and quality.