Break-even Exercises (40 marks; 40 minutes)

Question 1. 20 marks

Margin of safety
250

200

150 Revenue
£000s Total cost
100 Fixed cost

50

0
0 10 20 30 40 50
Output 000 units

1.1 Mark on the graph the profit being made at 50,000 units. State the figure. (2)

1.2 Mark and label the break-even point and the company’s latest sales level: 40,000 units. (4)

1.3 Mark in the margin of safety. State the figure. (3)

1.4 Use the data provided to calculate the selling price and the variable cost per unit. (4)

1.5 From this, calculate a) the contribution per unit and b) the total contribution at 30,000 units. (4)

1.6 Calculate the profit if sales grow to 45,000 units. (3)

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Question 2. (20 marks)

Price increase to £6
300

250

200 Revenu
e

150 Total
£000s
cost
100
Fixed
cost
50

0
0 10 20 30 40 50
Output 000 units

2.1 Mark on the graph the effect of the price being increased to £6. (3)

2.2 Mark on the graph the old and new break-even points. (4)

2.3 Check the new break-even point at £6 selling price by calculation. Show workings. (4)

2.4 If charging £6 pushes demand down from 40,000 units to 30,000, calculate the new:

i. Safety margin (2)

ii. Profit. (3)

2.5 Should the business push the price up or not? Explain your reasoning. (4)

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ANSWERS:

1.1 £50,000

Fig 34.4 Margin of safety

250

200

150 Revenue
£000s Total cost
100 Margin of safety Fixed cost

50

0
0 10 20 30 40 50
Output of Aromatics (000kg)

1.3 40,000 – 25,000 = 15,000 units

1.4 Selling price is £250,000/50,000 = £5 per unit

Variable cost per unit is £150,000/50,000 = £3 per unit

1.5a) £2

b) £60,000

1.6 45,000 x £2 = £90,000 minus £50,000 fixed costs = £40,000

PTO

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Answers: Q2

Price increase to £6
300

250 Reven
ue

200 New
reven
ue
150
£000s Total
New break-even cost
100 Old break-even
Fixed
cost
50

0
0 10 20 30 40 50
Output 000 units

2.1 Mark on the graph the effect of the price being increased to £6. (3)

New revenue line as above. 1 mark for starting at £0; 1 for ending at £300,000; 1 for label

2.2 Mark on the graph the old and new break-even points. (4)

As above: 1 mark for each line; 1 mark for each label

2.3 Check the new break-even point at £6 selling price by calculation. Show workings. (4)

Break-even = Fixed costs/contribution per unit (1)

Calculation of contribution per unit = £6 - £3 variable cost per unit = £3 (1)

Calculation of break-even: £50,000/£3 (1) = 16,667 units (1)

2.4 If charging £6 pushes demand down from 40,000 units to 30,000, calculate the new:

i. Safety margin = 30,000 minus 16,667 (1) = 13,333 (1)

ii. Profit. = 30,000 x £3 = £90,000 total contribution (2) minus £50,000 = £40,000 (1)

2.5 Should the business push the price up or not? Explain your reasoning. (4)

At £5 and 40,000 sales, profit was 40,000 x £2 = £80,000 minus £50,000 = £30,000. So the price rise
boosts profit by £10,000 (33%). On the basis I would say yes, increase the price.

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