BREAK EVEN ANALYSIS assignment questions and answers

ASSIGNMENT 1 – BREAK EVEN ANALYSIS

1.      Smith is opening a new line of scissors for supermarket distribution. It estimates its fixed cost to be $500 and its variable cost to be $0.50 per unit. Selling price is expected to be $0.75 per unit. Find Smith’s break-even point in units and in dollars.

Formula:

px = vx + FC + Profit

Where,

1.      p is the price per unit,

2.      x is the number of units,

3.      v is variable cost per unit and

4.      FC is total fixed cost.

As such:

$0.75 per unit = $0.50 per unit + $500

Solve for x:

X =  = 2000. Thus, 2,000 units of scissors will need to be sold in order for the company to attain breakeven from the new establishment.

And

Break-even Sales Dollars = Price per Unit × Break-even Sales Units

 = 0.75 x 2,000 which is = 1,500

Thus, $1,500 is the dollar value at which breakeven will be achieved.

2.      Jane, the owner of Papa’s Pizza, is considering a new oven in which to bake the firm’s signature dish, vegetarian pizza. Oven type A can handle 20 pizzas an hour. The fixed costs associated with oven A are $20,000 and the variable costs are $2.00 per pizza. Oven B is larger and can handle 40 pizzas an hour. The fixed costs are $30,000 and the variable costs are $1.25 per pizza. The pizza sells for $14 each.

a.       Find the break even points in units for each oven.

Breakeven for type A pizza x =  = 1,666.6 units of pizza need to be sold in order to obtain breakeven for Type A

Breakeven for type B pizza x =  = 2,352.9 units of pizza need to be sold in order to obtain breakeven for Type B

b.      If the owner expects to sell 9000 pizzas, which oven should she purchase?

Type B: because the profit will be twice what will be obtainable from type A considering the fact that it produces pizza at the ration of TypeB:TypeA, 40:20 or 2:1

Profit for type a = 9000/20 x 14 = 6,300 – 1,666,6units ($23, 3332) = 4366.4 units

Profit for type B = 10,247.1 units of pizza - which makes it justifiable

c.       If the owner expects to sell 12,000 pizzas, which oven should she purchase?

Type B: because the profit will be twice what will be obtainable from type A considering the fact that it produces pizza at the ration of TypeB:TypeA, 40:20 or 2:1

3.      An electronic firm is currently manufacturing an item that has a variable cost of $0.50 per unit and a selling price of $1.00 per unit. Fixed costs are $14,000. Current volume is 30,000 units. The firm can substantially improve the product quality by adding a new piece of equipment at an additional fixed cost of $6,000. Variable cost would increase to $0.60, but volume should jump to 50,000 units due to higher-quality product.

a.       Should the company buy the new equipment?

At fixed cost of $14,000, the company makes profit of $15,000 for every 30,000 units sold. But the new machine will increase the fixed cost to $20,000 and reduced the profitability to $0.40 as a result of increase in variable cost to $0.60. In any case, production is increased to 50,000 units with a profit of $20,000. However, since the company makes $1,000 from the former machine after deducting $14,000 fixed cost from generated revenue of $15,000 and makes no profit from the new machine since fixed cost is equal to the generated revenue, the decision is that the company SHOULD NOT but the new machine.

b.      The company is now considering the new equipment and increasing the selling price to $1.10 per unit. With the higher-quality product, the new volume is expected to be 45,000 units. Under these circumstances, should the company purchase the new equipment and increase the selling price?

The old machine generates revenue of $18,000 and profit of $4,000 after deducting production cost, but the high quality machine generates revenue of $22,500 and profit of $2,500 (following the decrease in unit from 50,000 to 45,000). As such, the decision is NO! the company SHOULD NOT buy the new high quality machine.

4.      Jack and Jill have joined forces and produced a food processor for industrial use. Jack has years of food processing experience and Jill has extensive commercial food preparation experience. They think a largely manual process will have a monthly fixed cost of $37,500 and variable costs of $1.75 per unit. A more mechanized process will have a fixed cost of $75,000 per month with variable costs of $1.25 per unit. Selling price is $2.50 per unit.

a.       Find the break even quantity for the manual and mechanized process.

Solution = fixed cost / selling price – variable cost

              = $75,000 / $2.50 - $1.25

              = 60,000 units

b.      Find the revenue at the break even quantity for manual and mechanized process.

Solution for manual = first determine units sold

                                 = $37,500 / $2.50 - $1.75

                                 = 37,499.25 units

Now, multiply units with selling price

                                 = 37,499.25 units x $2.50

Dollar value for manual = $93,748.125

Automatic process = do the same as above in the manual process. Thus:

Dollar value for automatic process = 60,000 units x $2.50 = $150,000

c.       Find the monthly profit or loss of the manual process if they expect to sell 60,000 units per month.

At 60,000 per month, profit or loss = first determine the fixed cost

                                                         = $37,500

Now determine the profit per unit and multiply total unit

                                                          = $0.75 x 60,000 unit = $45,000

Good! Now minus total revenue from fixed cost to get answer

                                                           = $45,000 - $37,500 = $7,500 profit

d.      Find the monthly profit or loss of the mechanized process if they expect to sell 60,000 units per month.

Do the same as in “c” above for the mechanized process

Answer will be = $1.25 x 60,000 unit = $75,000

As such, the company just breakeven = no profit or loss as generated revenue is equal to cost

e.       At what quantity would Jack and Jill be indifferent to the process selected?

It is not possible because the fixed cost for mechanical process is twice that of the manual process, while the variable cost differs by 0.25. Meaning that for any revenue obtained, the amount deductible as fixed cost in manual process will be half of what is deductible in the mechanical process, which makes it impossible for the two process to attain the save dollar value in terms of profit or loss with the same quantity.