FRIENDS

BREAK EVEN
ANALYSIS CASE
STUDY
Submitted by: Dela Paz, Buenalee Co
ANSWERS:

1.)

a. Break Even Point for Charms Break Even Point for Flames

Break Even Point = Fixed Cost Break Even Point = Fixed Cost

Contr. Margin Contr. Margin

B.E.P = 500+3000 B.E.P= 500+6000

6 60 - 5 60-5

B.E.P = 64 tickets B.E.P= 119 tickets

b. B.E.P % = 64 x 100 B.E.P % = 119 X 100

200 200

B.E.P % = 32% B.E.P % = 59.50%

2. )

a. Tickets Total Revenue Total V.C Total F.C Profit

150 9,000 750 3500 4,750

200 12,000 1000 3500 7,500

250 15,000 1250 3500 10,250

300 18,000 1500 3500 13,000

b. Tickets Total Revenue Total V.C Total F.C Profit

150 9,000 750 6500 1,750

200 12,000 1000 6500 4,500

250 15,000 1250 6500 7,250

300 18,000 1500 6500 10,000

 3. )

119 - 64 = 55 tickets

4.)

Unit Sales = Costs + Target Profit

C.M per unit

Charms Flames

Unit sales = 6500 + 8000 Unit Sales = 6500 + 8000

55 55

Unit sales = 209 tickets Unit Sales= 264 tickets

5. )

Finding the profit levels at maximum and minimum limits

Profit = [Unit Sales (Q) x C.M] - F.C

Lower limit = 150 tickets

P = 50 P = 40 P = 40

Q = 150 Q = 170 Q = 190

Charms $4,750 $4,150 $5,050

Flames $1,750 $1,150 $2,050

Upper limit = 200 tickets

P = 50 P = 40 P = 40

Q = 200 Q = 220 Q = 240

Charms $7,500 $6,400 $7,300

Flames $4,500 $3,400 $4,300

 6. )

Selecting Charms is more profitable solution since the Friends concern is to get by this year and
then concentrate on future dances. If price level is reduced to $40, Charms yield profit of $7300 while
Flames result in disappointing $4300. Although it is probable that 200 ticket can be sold even in case of
Chars as well, however in case of not meeting with the goal of selling 200 tickets, the higher overhead
costs of selecting Flames will result in losses which not acceptable for the organization. Break Even point
percentage in case of Charms is 32%while in case of Flames it is 59.5%. Organizations prefer lower B.E
point to gain increased profits. As found in question 5, Friends is unable to generate $8000 even under
best case scenario with 240 tickets sold, in this situation, it is better to pick Charms yielding higher profit
to stand on its own this year. Moreover even in worse case scenario with 150 tickets sold, Charms gives
2.5 times the profit i.e. $4750 vs 1750. Choosing Flames will give the organization qualitative benefits
over Charms.

7. )

The assumptions of break even analysis are, All costs can be separated into fixed and variable
components, Fixed costs will remain constant at all volumes of output, Variable costs will fluctuate in
direct proportion to volume of output, Selling price will remain constant, Product-mix will remain
unchanged, The number of units of sales will coincide with the units produced so that there is no
opening or closing stock, Productivity per worker will remain unchanged, lastly, There will be no change
in the general price level. Yes, because Break-even analysis is one of vital importance in determining the
practical application of cost functions. It is a function of three factors, i.e., sales volume, cost and profit.
It aims at classifying the dynamic relationship existing between total cost and sale volume of a company.

Hence it is also known as “cost-volume-profit analysis”. It helps to know the operating condition
that exists when a company ‘breaks-even’, that is when sales reach a point equal to all expenses
incurred in attaining that level of sales.
 8. )

Profit for Charms = 270 x 60 - (1350 + 3500)

Profit =$11,350

Profit for Flames = 270 x 60 - (1350 + 6500)

Profit =$8,350

Charms gives immediate profit to the company which is why it is preferrable.

9. )

The demand curve suggests about the band that has more demand as compared to the othIf
opportunity costs, demand curves are same, profits are the same. If both are equally famwe cannot
choose one among the two options