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DPB2033

BUSINESS MATHEMATICS

Exercises
Chapter 2
Break-Even Point
Analysis
Problem # 1
Try out this problem for your self

If a firm receives $100 revenue from selling


5 units of a product, and pays $25 in total
variable costs, then what is the contribution
and contribution margin (%) of each unit?
Answer ($15, 75%)
Answer
Total Revenues = Selling Price per unit * Units Sold
= $20 * 5
= $100

Total Variable Costs = Unit Variable Costs * Units Sold


= $5 * 5
= $25

Unit Contribution = P per unit V per unit


= $20 - $5
= $15

Contribution Margin % = (Unit Contribution / Selling Price) * 100


= ($15 / $20) x 100
= 75%
Problem # 2
Try out this problem for your self

You own a lemonade stand.


It costs you RM 1.50 to make cup of
lemonade
You sell your lemonade for RM 5.00.
It cost you RM 5,000 to rent for the space of
your lemonade stand.
How many cups of lemonade do you have to
sell to breakeven?
Solve now
Answer (1, 429 cups, RM7, 145)
Answer
Given: V
= RM 1.50 P = RM 5.00
F = RM 5,000
Solution:

BEP units = F /( P V)
= 5000 / ( 5 1.50)
= 5000/ 3.5
= 1, 428.57
BEP units 1, 429 units

BEP sales = BEP x P


= 1, 429 x 5
BEP sales RM 7, 145
Problem # 3
Swiss entrepreneur Herr Zeitgeist buys watch faces
from Italy for 5 Euros, buys watch mechanisms for 15
Euros from Spain, and hires assembly in Portugal for
10 Euros per watch.

His only other expense is 100,000 Euros he pays the


Zuricher Flughafen ad agency to place ads in in-flight
magazines to build the Zeitgeist brand.

Herr Zeitgeist sells each watch for 50 Euros to airport


duty-free shops, earning the retailer an 80% margin.

How many watches must he sell to break-even?


Answer (5, 000 watches, RM 250, 000)
Answer
Given: V = 5+15+10 = 30 Euros P = 50 Euros F = 100,000 Euros
Solution:

BEP units = F /( P V)
= 100,000 / ( 50 30)
= 100,000 / 20
= 5, 000
BEP units 5, 000

BEP sales = BEP x P


= 5, 000 x 50
BEP sales RM 250, 000
Problem # 4
Johnson Company and Smith Company are competing firms that offer limousine
service from the Charlesburg airport. While Johnson pays most of its employees on a
per-ride basis, Smith prefers to pay its employees fixed salaries. Information about
the selling prices per ride and cost structures of the two firms is given below.

(a) Draw two graphs plotting profit as a function of the number of rides for the two firms.
Answer
(Johnson = 50,000 rides, $1, 500,
000)
Answer
(Smith = 100,000 rides, $3,
000, 000)
Answer