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Break Even Analysis (Problems)
Break Even Analysis (Problems)
ACCOUNTING
Break Even
Break Even Point (Sales Revenue) Break Even Point (units) * Selling Price
BEP = (BEP * SP)
Margin of Safety (Sales Revenue) Margin of Safety (units) * Selling Price (pu)
MOS = (MOS * SP)
1
BREAK EVEN ANALYSIS
Jack Jones is starting a business and will have to consider all costs. Jack has decided to manufacture
and sell leather jackets. He will first consider what is called the Variable Costs of producing the
jackets - ie the essential materials and labour required.
1. aLeather
2. Buttons
3. Lining Material
4. Thread, etc
5. Direct Labour. This is the wage costs of any worker involved in the manufacture of the leather
jackets and is also treated as a Variable Cost, but NOT salaries of supervisors, management, etc
as they oversee production but do not have any part in the process of making the jackets.
Variable Costs are said to vary with production. This means the more jackets you manufacture the
higher your variable costs should be. Therefore costs such as leather, labour, etc will increase if
production increases, but should also decrease when production falls.
EXERCISE 1
The following costs have been estimated for the manufacture of a leather jacket.
Material Cost per unit – eg leather, buttons, thread, etc £40
Labour Cost per unit – cutters, machinists, etc £20
Complete the table below showing material and labour costs at different levels of output/production
VARIABLE OUTPUT – 10 OUTPUT – 20 OUTPUT – 30 OUTPUT – 40
COSTS UNITS UNITS UNITS UNITS
Material Cost
Labour Cost
TOTAL
VARIABLE
COSTS
It is clear to see from the table above that the more units we produce, the higher the variable costs
become.
EXERCISE 2
The following costs have been estimated for the manufacture of leather belts.
Material Cost per unit £3
Labour Cost per unit £1
Other Variable Overheads per unit £0.50
2
TOTAL
VARIABLE
COSTS
* The higher the level of output – the more we have to pay in Variable Costs
In addition to considering Variable Costs, Jack will also take into account his Fixed Costs.
FIXED COSTS/OVERHEADS
These costs remain the same no matter what happens to production levels. If output/production is
high, Fixed Costs remain the same, if output/production is low, Fixed Costs remain the same.
Examples of fixed costs are:
Rent
Wages of Assistant working in shop
Insurance
Electricity
Gas
If your landlord is charging £500 each month for Rent, then he will continue to charge you £500 each
month. It does not matter to him if you are producing 200 leather jackets or 2 leather jackets - you are
simply renting premises from him.
EXERCISE 3
Complete the table below showing Fixed Costs at different levels of output/production
FIXED COSTS OUTPUT – 10 OUTPUT – 20 OUTPUT – 30 OUTPUT – 40
UNITS UNITS UNITS UNITS
Rent £500
Wages of Assistant
£400
Insurance £40
Electricity £60
It is clear to see from the table above that fixed costs do not vary with changes in production
EXERCISE 4
You have started a new business making designer greetings cards. A small outlet has been rented by
you and you will be expected to pay all the usual costs – rent, electricity, gas, etc.
You have also employed 2 members of staff who will receive wages from you – one will help you to
make the cards (Manufacturing Wages) the other will serve customers (Shop Assistant Wages).
To make the cards will require materials such as, card, ribbon, glitter, etc.
From the information given above, plus any other expenses that you can think of, list the expenses
under the following headings:
3
VARIABLE COSTS FIXED COSTS
Complete the table below showing Variable Costs, Fixed Costs and Total Costs at different levels of
output/production
10
20
30
40
4
50
60
70
Sales Revenue or Sales = (No of units sold) x (Selling Price per unit)
EXAMPLE – IF WE PRODUCE 200 UNITS AND ARE PAID £5 PER UNIT:
SALES REVENUE = (200 X £5) = £1,000
EXERCISE 6
Eric Cooper makes ceramics for a local gift shop which he sells for £50 each. Eric estimates the
following costs:
Labour = £10 per unit
Materials = £20 per unit
Fixed Costs = £3,000
Complete the following table:
30
60
90
120
150
180
210
BREAK-EVEN POINT – THIS IS WHERE A FIRM MAKES NEITHER A PROFIT NOR A LOSS
– THEY SIMPLY MAKE ENOUGH SALES REVENUE TO COVER TOTAL COSTS.
The Break Even Point in the table above is .................... units with Sales Revenue of £..........................
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CONTRIBUTION
This is the name given to the Selling Price (per unit) – Variable Cost (per unit).
EXAMPLE
Per unit
If we now learn that Fixed Costs for the year are estimated to be £4,000 – how many units must be
sold so that this firm simply Breaks-Even – makes no profit but brings in enough Sales Revenue to
cover its Fixed Costs.
= £4,000
40
= 100 UNITS
EXERCISE 7
Calculate the Break-Even point in units and sales revenue from the information given below:
EXERCISE 8
Calculate the Break-Even point in units and sales revenue from the information given below:
Total Fixed Costs £48,000
Variable Costs per unit £12
Selling price per unit £24
6
TO CALCULATE TOTAL CONTRIBUTION
EXERCISE 9
Variable Costs per unit:
Materials £10
Labour £15
Selling Price £40
Total Fixed Costs £60,000
Output 5,000 units
EXERCISE 10
Variable Costs per unit:
Materials £12
Labour £10
Selling Price £30
Total Fixed Costs £40,000
Output 7,000 units
TO CALCULATE PROFIT/LOSS
EXERCISE 11
Selling Price per unit £30
Variable Cost per unit £20
Fixed Costs £100,000
Output 15,000 units
EXERCISE 12
Selling Price per unit £50
Variable Cost per unit £30
Fixed Costs £140,000
Output 10,000 units
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EXERCISE 13
Selling Price per unit £40
Variable Cost per unit £15
Fixed Costs £50,000
Output 4,000 units
EXERCISE 14
Selling Price per unit £80
Variable Cost per unit £40
Fixed Costs £160,000
Output 6,500 units
EXERCISE 15
Three firms have supplied the following information:
A ANDERSON B BENSON C CAMERON
Variable costs per unit £3.00 £4.50 £6.80
Selling price per unit £6.00 £8.50 £11.80
Fixed Costs £4,500 £6,400 £17,500
Output 3,000 units 4,000 units 5,000 units
1. Calculate the contribution per unit for each firm
2. For each firm find the break-even point in units of output
3. For each firm find the sales revenue at break even point
4. Calculate the total contribution at the different levels of output for each firm
5. Calculate the profit/loss for each firm
EXERCISE 16
Three firms have supplied the following information:
JACKSON HENDERSON LYLE
Variable costs per unit £5.00 £6.00 £8.00
Selling price per unit £10.00 £8.00 £12.00
Fixed Costs £10,000 £8,000 £12,000
Output 4,000 units 5,000 units 6,000 units
1. Calculate the contribution per unit for each firm
2. For each firm find the break-even point in units of output
3. For each firm find the sales revenue at break even point
4. Calculate the total contribution at the different levels of output for each firm
5. Calculate the profit/loss for each firm
EXERCISE 17
Three firms have supplied the following information:
LEE DARGAN BURNS
Variable costs per unit £10.00 £12.00 £11.00
Selling price per unit £16.00 £20.00 £18.00
Fixed Costs £12,000 £24,000 £35,000
Output 3,000 units 6,000 units 9,000 units
8
1. Calculate the contribution per unit for each firm
2. For each firm find the break-even point in units of output
3. For each firm find the sales revenue at break even point
4. Calculate the total contribution at the different levels of output for each firm
5. Calculate the profit/loss for each firm
EXERCISE 18
Novelties plc assembles novel clocks and has estimated the following figures for a new style:
£
Selling price per unit 34
Variable costs per unit:
Component parts 12
Wages 6
Total Fixed Costs £8,960
EXERCISE 19
The following data has been supplied by D Denver, who is considering manufacturing a new style of
shirt:
£
Selling price per unit 21.00
Variable costs per unit:
Materials 6.50
Wages 4.50
Total Fixed Costs £33,000
1. Calculate the contribution per shirt
2. Find the break-even point in unit of output and sales revenue
3. What is the new contribution per shirt if they could be sold at £22 each?
4. Calculate the new break-even point in units at the increased selling price
5. What is the sales revenue of these units?
9
MARGIN OF SAFETY (MOS)
This is the number of units sold above the Break Even point eg if the Break Even point is 400 units
and we manage to sell 700 units then the Margin of Safety = (700 units – 400 units) = 300 units. This
means that the first 400 units sold covers our Fixed Costs and the remaining 300 units are now profit
earned by the Company.
TO CALCULATE MARGIN OF SAFETY IN UNITS
EXAMPLE
Calculate:
1. Margin of Safety in units
2. Margin of Safety in Sales revenue
3. Profit at estimated Sales of 500 units
10
EXERCISE 20
Calculate:
EXERCISE 21
Calculate:
EXERCISE 22
Alert plc installs burglar alarm systems and expects to install 400 units of System A in the next year.
Costs are estimated as follows:
£
Total fixed costs £81,400
Selling price per unit £850
Variable costs per unit £480
11
EXERCISE 23
Downies plc makes quilts and has budgeted the following figures for an output of 20,000 units:
£
Total fixed costs £198,400
Selling price per unit £85
Variable costs per unit £54
EXERCISE 24
£
Total fixed costs £60,000
Variable costs per unit
Materials £36
Wages £15
Variable Expenses £3
Selling price per unit £78
EXERCISE 25
Outdoor Relaxing plc produces loungers and hopes to sell 1,000 in the coming year. The following
figures are forecast:
£
Selling price per unit £52
Variable costs per unit £28
Total Fixed Costs £13,920
12
EXERCISE 26
£
Selling price per unit £40
Variable costs per unit £25
Total Fixed Costs £45,000
EXERCISE 27
£
Selling price per unit £60
Variable costs per unit £40
Total Fixed Costs £10,000
EXERCISE 28
£
Selling price per unit £65
Variable costs per unit £35
Total Fixed Costs £90,000
A leather company produces briefcases and has provided the following data:
£
Total Fixed Costs 19,800
Variable Costs per Unit
Materials 30
Fastenings and locks 12
Wages 25
Selling price per unit 139
13
You are required to find the following
EXERCISE 30
The following figures relate to ornamental trees supplied by nurserymen J & M Dawson, who have
fixed costs of £6,480:
£
Selling price per tree 36
Variable costs per tree 20
EXERCISE 31
Soundsleep plc produces beds which sell at £580 each. The following details of costs have been
supplied:
£
Variable Costs per Unit
Materials 80
Component parts 120
Wages 100
Total fixed costs 686,000
Sheila’s Fitboards make and sell skateboards. Production is limited to 400 skateboards.
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(iii) Break-even point in sales revenue
(iv) Profit or loss at an output of 300 units
(v) Total maximum profit
(c) The following costs are either fixed or variable. Place a tick in the correct box.
EXERCISE 33
Patrick’s Skates make and sell ice skates. Production is limited to 500 units.
(c) The following costs are either fixed or variable. Place a tick in the correct box.
15
EXERCISE 34
Jackson Communications make and sell mobile phones. Production is limited to 600 units.
(c) The following costs are either fixed or variable. Place a tick in the correct box.
Kev plc makes and sells calculators. Production is limited to 1000 units.
16
(c) The following costs are either fixed or variable. Place a tick in the correct box.
EXERCISE 36
John makes and sells action figures. Production is limited to 1,000 figures.
(c) The following costs are either fixed or variable. Place a tick in the correct box.
17
EXERCISE 37
Jessica Alan makes and sells ceramics. Production is limited to 800 units.
(c) The following costs are either fixed or variable. Place a tick in the correct box.
EXT EXERCISE 1
£
Selling price per unit £80
Variable costs per unit £40
Total Fixed Costs £40,000
EXT EXERCISE 2
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£
Selling price per unit £100
Variable costs per unit £50
Total Fixed Costs £200,000
EXT EXERCISE 3
£
Selling price per unit £25
Variable costs per unit £5
Total Fixed Costs £60,000
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BREAK-EVEN CHARTS
Break-even charts show the following:
Fixed Costs – as fixed costs do not vary with production – this is always represented by a flat
horizontal line
Break even point in units and sales revenue – this is where the total fixed costs and sales revenue
lines intersect
Margin of Safety – this is where the sales revenue is greater than total costs
Find a good point in the chart where it is easy to get an exact reading of Sales Revenue from the
chart – the Break-even point is usually a good place
Divide the Sales Revenue at that point by the Output at that point to give you the Sales Revenue
per unit
NOTE: Variable Costs are not shown in a Break-even chart – but we are given Total Costs –
(Total Costs – Fixed Costs) = Variable Costs
Find a good point in the chart where it is easy to get an exact reading of Total Costs from the
chart - the Break-even point is usually a good place
Subtract Fixed Costs from the Total Cost and this gives us the Variable Costs
Divide the Variable Costs at that point by the Output at that point to give us the Variable Cost per
unit
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