Download Break-even Analysis

Business Management – Project Section 3.3 – Break-even Analysis
Question 1. Calculating the break-even quantity (6 marks)
a) (2 marks) Use the contribution per unit method to calculate the break-even quantity for a firm
that has fixed cost of $200 000, average variable cost of $10 and a price of $35.
b) (2 marks) Calculate the value of total revenue at the break-even quantity.
c) (2 marks) Calculate the value of total cost at the break-even quantity.
Question 2. Calculating the margin of safety (8 marks)
Tread-it is a manufacturer of hiking shoes. Play-it produces wooden toys for children. Cost and revenue
data for both businesses are shown in the table below.
Tread-it
Break-even quantity
Output
Margin of safety (units)
Margin of safety (%)
Play-it
250
500
(b)
100
500
(a)
300
(c)
a) (3 marks) Calculate the missing figures for (a), (b) and (c) in the table above.
b) (5 marks) Comment on which firm has the better margin of safety.
Question 3. TMR Day-Care Centre (18 marks)
Thuy and Mark Rees run a children’s day-care center in Hanoi, Vietnam. The main clients are working
parents, who pay a fixed $20 per child for the whole day. Children learn through play and are engaged in
activities, such as art, music, dance and physical education, at TMR Day-Care Centre. The business is
open for an average of 22 days each month. The firm’s expected costs and revenue for the next year are
as follows:
Capacity
Demand
Price
Materials
Rent
Salaries
Administration
Utility bills
a)
b)
c)
d)
e)
f)
25 children per day
80% of capacity
$20 per child per day
$4 per child
$600 per month
$1000 per month
$100 per month
$140 per month
(2 marks) Calculate the sum of the fixed costs.
(3 marks) Calculate the break-even quantity per month.
(2 marks) If the business works at 80% of its capacity, calculate the margin of safety.
(3 marks) Construct a fully labelled break even chart for TMR-Day-Care Centre.
(2 marks) Identify the break-even point, the break-even quantity and the margin of safety on your
chart.
(6 marks) Examine the strengths and weaknesses of using break-even analysis for a business such
as TMR Day-Care Centre.
Question 4. RT’s Hotdogs. (9 marks)
Rhys Thomas runs a hot dog stall outside a busy shopping mall. His expected costs and revenues for the
next few months are shown below:
Capacity
Sales Volume
Unit Price
Ingredients and Materials
Rent
Salary
Other overhead costs
Utility Bills
200 hotdogs per day
110 hotdogs per day
$2.50
$0.8 per hotdog
$200 per month
$500 per month
$320 per month
$140 per month
a) (4 marks) Construct a break-even chart for RT’s Hotdogs, showing the monthly break-even
quantity
b) (5 marks) Assume that the average daily sales volume increases to 70% of capacity and that rent
rises by 50%. Determine the effect of these changes on your break-even chart and comment on
your findings.
Question 5. Mendoza Taxi Services (11 marks)
Jose Mendoza runs a taxi service in Manila, Philippines. The average price charged to customers is 330
pesos. Its fixed costs are 6400 pesos per month, and the average costs of each journey is 130 pesos. The
average number of taxi journeys each month is 66.
a)
b)
c)
d)
(2 marks) Calculate the break-even quantity for Mendoza Taxi Services
(2 marks) Calculate the margin of safety for Mendoza Taxi Services
(3 marks) Calculate the expected annual profit for Mendoza Taxi Services.
(4 marks) Calculate the target price of each journey if Jose Mendoza has a monthly target profit
of 8000 pesos (Assume that the target profit output equals the demand of 66 rides)
Question 6. Rodriguez Art Studio Ltda. (18 marks)
Giselle Rodriguez owns Rodriguez Art Studio Ltda. In Havana, Cuba. It has overhead costs of $3000 per
month. The variable cost and price are $5 and $20 respectively, per person per lesson. There are
typically 500 customers each month although the firm’s maximum capacity is 600 clients.
a) (2 marks) Calculate the break-even quantity for Rodriguez Art Studio Ltda.
b) (2 marks) Calculate the margin of safety for the business
c) (3 marks) Construct a fully labelled break-even chart for Rodriguez Art Studio Ltda.
Suppose in the subsequent time period that rent increases, thus raising the firm’s overheads to $4000
per month. Also Giselle Rodriguez reduces her price to $17 which raises demand to 520 clients per
month.
d) (2 marks) Calculate the new break-even quantity.
e) (3 marks) Construct a fully labelled break-even chart for the new scenario.
f) (6 marks) Explain whether the change in price was a sensible decision.