IB BM HL 5.5.2 Break-even Analysis

[Maximum number: 6]

Sock Paradise (SP)
After conducting primary market research, Pam opened Sock Paradise (SP), which sells colourful socks. SP operates a retail stall in a large department store and sells online through its own website.
Table 2 shows selected financial data for SP for 2020.

Table 2: Selected financial data for SP for 2020

At the end of 2020, the department store told Pam that it would increase rent by $14000 per year starting on 1 January 2021. Pam forecast total sales for 2021 as 18000 pairs of socks; other costs and prices were forecast to remain unchanged.

(a)

Using the selected financial data in Table 2, calculate for SP for 2020:

[ 6 ]

(i)

the break-even level of output (show all your working);

[ 2 ]

(b) Using the selected financial data in Table 2, calculate for SP for 2020:
(i) the break-even level of output (show all your working);
$9.00 minus $4.00 = $5.00 = contribution
$\frac{\$ 60000[\text { fixed costs] }}{\$ 5.00}=12000$ units

12000 units is the break-even level of output. Do NOT penalize if missing word, units.

Award [1] for correct method and [1] for correct answer, for a maximum award of [2].
If a candidate uses a correct alternate method, accept. If a candidate only lists the answer but shows no workings, award [1].
If candidate calculates contribution but gives wrong break-even level of output award [1].

(ii)

the margin of safety (show all your working);

[ 2 ]

(iii)

the net profit (show all your working).

[ 2 ]

net profit for 2020 (show all your working).

Actual profit (year 2020)
$\$ 9.00 \times 15000=\$ 135000 \mathrm{in}$ sales revenue
$\$50000$ + $\$10000$ = $\$60000$ in fixed costs (FC)
$\$ 4.00 \times 15000=\$ 60000$ in variable costs (VC)
Net profit $=\$ 135000-\$ 60000-\$ 60000=\$ 15000$
Alternative methods
Net profit = total contribution minus FC ( $15000 \times \$ 5$ ) - $60 000= $\$15000$ .
or
Net profit = MoS × contribution per unit $=(18000-15000) \times(\$ 9-\$ 4)= 3000 \times \$ 5=\$ 15000$

Award [1] for correct method and [1] for correct answer, for a maximum award of [2].
N.B. A break-even chart is not required to be drawn and will gain no marks if presented without the above calculations.

IB Business Management HL 5.5.2 Break Even Chart and Analysis Questions

Exam points

IB Business Management HL 5.5.2 Break Even Chart and Analysis Questions question 1

Question (a)

Question (i)

Question (ii)

Question (iii)