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Break Even Tutorial

The document discusses several questions related to business operations and financial analysis. It provides details about a bungee jumping business including costs, ticket prices, and operating hours for two equipment models. It also includes financial information about a hamburger restaurant and building company. The questions require calculating break-even points, margins of safety, cash flows, and determining the number of units that need to be sold to achieve a desired profit level.

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leeroybradley7
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© © All Rights Reserved
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10 views

Break Even Tutorial

The document discusses several questions related to business operations and financial analysis. It provides details about a bungee jumping business including costs, ticket prices, and operating hours for two equipment models. It also includes financial information about a hamburger restaurant and building company. The questions require calculating break-even points, margins of safety, cash flows, and determining the number of units that need to be sold to achieve a desired profit level.

Uploaded by

leeroybradley7
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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QUESTION 1

Friends of yours have decided to start a bungee jumping facility over weekends and have registered Just
Jump CC for purposes of trading. No equipment has been acquired yet.

The procedures for bungee jumping are the following:


A group of six people get into a cage, which is hoisted up to a certain height with a crane.
One person jumps at a time, and his/her only connection to the cage is a rubber band. The one end
of the rubber band is fixed to the cage; the other end is fixed to the waist or legs of the person
jumping. After swinging for some time on the rubber band, the person is released onto a safety
mattress on the ground. As soon as everybody has had a turn to jump, the cage is lowered to the
ground and ready for a new group of people.
The facility will be made available at different locations, depending on the events in a specific area,
therefore the unit to be acquired must be mobile.
There are only two suitable models available, the details of which are as follows:

Model A Model B
Height of jump 45 metres 60 metres
Cost price of unit $450 000 $500 000
Duration of session, based on a group of six people
(including the time required to hoist up the cage) 45 minutes 60 minutes
Annual fixed operating expenses $389 325 $423 950
Variable costs per jump $13 $13
Selling price of tickets per person per jump $100 $135

The facility will be in operation from 09:00 daily on every Saturday and Sunday of the year. The last
jumpers have to be back on the ground by 21:00. It is envisaged that it would operate at full capacity,
no matter which model is acquired.

REQUIRED
(a) Determine the breakeven point in terms of a number of jumps in respect of Model B. (3)
(b) Determine, only with regard to Model A, how many jumps would ensure an annual net
profit of $302 325. (5)
(c) Calculate the margin of safety envisaged for Model B and give a brief description of the
significance thereof. (7)
(d) State three factors (other than estimated profitability) that your friends should take into
account before they decide which model to acquire. (5)
QUESTION 2
One of your clients, Mr. Dzoke Benito, opened “The Chocolate Kingdom Humburgers” a few years
ago. For this purpose, a building was rented at $2 400 per month. Three ladies were employed full-
time to work at the restaurant and nine students were employed to work for 20 hours per week
delivering hamburgers. You were appointed to render tax and accounting services at $1 800 per
month. All restaurant equipment and delivery vehicles were initially acquired for cash.

Mr Benito sells hamburgers at $8,00 each. Because of the excellent quality of his food he has
expanded his business. Profits have more than doubled since then, but Mr. Benito does not
understand why his profits have increased more rapidly than his sales volume.
The following is a projected income statement for the year ended 28 February 2017:

THE CHOCOLATE KINGDOM


Projected income statement for the year ending 28 February 2017

Sales 720 000


Purchases 270 000
Wages and fringe benefits of restaurant employees 62 400
Wages and fringe benefits of delivery staff 91 520
Rent 28 800
Accounting services 21 600
Depreciation
- Restaurant equipment 20 000
- Delivery vehicles 32 000
Utilities 11 200
8 400 545 920
Net profit before taxation 174 080
Taxation 60 928
Net profit 113 152

Mr Benito has noticed that expenses for utilities and supplies have remained constant over the
years. Assume that Mr Benito pay income tax at a rate of 35% of his income.
Assume that all transactions are cash transactions.
REQUIRED
(a) Calculate the breakeven point, expressed in terms of a number of hamburgers. (13)
(b) Calculate the cash flow breakeven point expressed in terms of a number of hamburgers. (5)
(c) (i) If Mr Benito withdraws $48 000 for personal use, calculate the cash that will
remain from the net cash acquired from business activities for the 2017
financial year. (5)
(ii)Briefly explain to Mr Benito why the cash remaining from the income producing
activities will exceed the profits for the year. (1)
(iii) Determine how much cash Mr Benito can withdraw during the 2017 financial year,
should he want his profit to equal the cash retained. (1)
(d) Mr Benito requires an after-tax net income of $160 000. Calculate the number of hamburgers
that should be sold in order to obtain the desired income. (5)

QUESTION 3
A building company constructs a standard unit which sells for $30 000. The company’s
costs can be readily identifiable between fixed and variable costs.

Sales Profit
(in units) $
January 18 70 000
February 20 100 000
March 30 250 000
April 22 130 000
May 24 160 000
June 16 40 000

Budgeted data for the coming six months includes the following:
You are told that the fixed costs for the six months have been spread evenly over the period
under review to arrive at the monthly profit projections.

Required:
(e) Prepare a graph for total sales, costs and output for the six months under review that shows:
(ii) The break-even point in units and revenue.
(iii) Total fixed costs.
(iv) The variable cost line.
(v) The margin of safety for the total budgeted sales.

(14 marks)
(b) The company is worried about the low level of sales. The sales director says that if the selling
price of the unit was reduced by $5000 the company would be able to sell 10% more units. All
other costs would remain the same you are told.
Determine whether the company should reduce the selling price to attract new sales in order to
maximize profit. Clearly show any workings. (5 marks)
(c) Evaluate whether the assumption that costs are readily identifiable as either fixed or variable
throughout a range of production is realistic. Give examples of any alternative classification. (6
marks)
(Total 25 marks)
QUESTION 4

TORIRO Ltd produces two products and the following budget apples for 2001:
Product X Product Y
($) ($)
Selling price 6 12
Variable costs 2 4
Contribution margin 4 8
Fixed costs apportioned $100 000 $200 000
Units sold 70 000 30 000

You are required to calculate the break-even points for each product and the company as and
comment on your findings.

QUESTION 5

(a) Nyati makes and sells a range of three gardening products.


Product E375 F294 G142
Sales volume (units) 20,000 17,000 16,000
Selling price per unit $250·00 $300·00 $170·00
Direct costs per unit:
Materials $47·50 $52·75 $38·30
Labour $28·88 $32·80 $21·32
Royalties $5·00 $7·00 $4·80
Production overheads $73·92 $95·04 $42·24
Budgeted data for the next year are:
Production overheads are absorbed on a machine hours basis, at a rate of $52·80 per machine hour.
40% of overheads are estimated to be fixed.
A total of 73,000 machine hours are available for the next year.

Required:

Based on the budgeted sales mix, calculate:


(i) the number of units of each product which will be sold at the break-even point;
(10 marks)
(ii) the margin of safety, expressed as a % of budgeted sales revenue.
(2 marks)
(b) Following the collation of the budgeted data provided in (a), new safety legislation was
introduced. The following changes will apply as a result of the legislation:
(a) additional features must be incorporated into all products at a cost of $8 per unit;
(b) the machinery must be upgraded at a cost of $80,000;
(c) the upgrade will not create any additional machine hours;
(d) the machine hours required for each product will increase by 5%
The marketing manager has stated that the selling price of E375 and F294 cannot be changed, but
that an increase of $2 per unit in the selling price of product G142 will be possible.
Required:
Calculate the number of units of each product which should be produced in order to maximise the
profit for the next year.

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