BREAK EVEN QUESTIONS

1.The break even level of output for a firm is 800 units and it is currently
making 950 units. What is its margin of safety?

Margin of safety is 150 units – current output level – break even level

2.What would happen to the break even point for a business if

 Price fell
 Insurance premiums were cut by 5%
 Rents were increased by 10%

If prices fell, the company would have to sell more to break even – B/E
point rises
Insurance is a FC, so the FC and TC line moves down meaning less has to
be sold to B/E – B/E point falls
An increase in rents shifts the FC and TC line up – more has to be sold to
cover costs – B/E point rises

3.Calculate the level of profit

TR = £2.3m and TC = £1.9m
TR = £260,000; FC = £120,000; TVC = £130,000
Price = £2.00; Sales = 6,000; FC = £5,000, VC per unit = 80p

Profit = TR – TC £2.3m - £1.9m = £0.4m

Profit = TR – TC (FC + TVC) £260,000 – (£120,000 + £130,000) = £10,000
TR = P * sales = £2.00 * 6,000 = £12,000
TC = FC + TVC + £5,000 + (6,000 * 80p) = £5,000 + £4,800 = £9,800
Profit = £12.000 - £9,800 = £2,200

4.FC = £4,000; VC per sale = £1,50; Selling price = £4.00

 Calculate the break even sales
 Calculate the revenue earned at the break even sales
 If sales are 1850 units, how much is the margin of safety
 How much profit is generated at sales of 1850 units
 FC rise to £5,000 – how much is the new break even level of
output
 Sales remain at 1850 – how much of a profit/loss is being made

B/E sales figure = FC/Contribution = £4,000/ (£4.00 - £1.50) = 1600 units

Revenue = 1600 units * £4.00 = £6,400
Margin of safety = Current sales – B/E sales = 1850 – 1600 = 250 units
Profit = margin of safety * contribution = 250 * £2.50 = £625
B/E = FC/Contribution = £5,000/£2.50 = 2000 units
Firm is making a loss of output shortfall*contribution = 150*£2.50 = £375
 5.A company manufacturing jackets has annual fixed costs of £100,000.
It sells the jackets for £60 and variable costs of making each jacket is
£20.
 How much does each jacket contribute towards the fixed costs?
 How many jackets does the company have to sell to break even?
 What are the revenue and costs at this break even sales point?
 If the company manufactures 3200 jackets, how much is the
margin of safety?
 At a sales level of 3200, calculate the amount of profit made

Contribution = Selling price – Variable Costs = £60 - £20 = £40

Break Even = FC/Contribution = £100,000/£40 = 2500 jackets
Revenue and costs will be the same at B/E sales TR=2500*£60 = £150,000
TC=£100,000+(2500*£20) = £150,000
Margin of safety = 3200 – 2500 = 700 jackets
Profit = margin of safety * Contribution = 700 * £40 = £28,000
TR = 3200*£60 = £192,000 TC = £100,000 + (3200*£20) =£164,000
Profit = £192,000 - £164,000 = £28,000