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IB Business Management SL5.5 Break-even analysisQuestion Bank

5.5 Break-even analysis

Question 1

[Maximum number: 6]

1. AXL
A X L has two factories, in which it manufactures aluminium cans for the soft drinks industry. A X L has a maximum production capacity of 80 million cans per year.

Table 1: AXL's forecasted sales revenue and costs for 2023

Table 1: AXL's forecasted sales revenue and costs for 2023

AXL plans to close its two factories and move production to a new, larger factory to obtain economies of scale.

In the first six months of 2022, increased competition led to a fall in AXL's sales. For the final two months of 2022, AXL plans to increase the trade credit period it offers to customers from 30 to 60 days.

Question 1(b)

(a)

Using Table 1, calculate:

[ 3 ]

Question 1(b)(i)

(i)

the contribution per unit (show all your working);

[ 2 ]

Question 1(b)(ii)

(ii)

the break-even level of output (no working required).

[ 1 ]

Question 1(c)

(b)

If AXL produces 75 million cans in 2023, using Table 1, calculate:

[ 3 ]

Question 1(c)(i)

(i)

the margin of safety (no working required);

[ 1 ]

Question 1(c)(ii)

(ii)

the profit (show all your working).

[ 2 ]

Question 1

[Maximum number: 8]

1. Hafs
Hafs is a new cooperative. It plans to manufacture wastepaper bins for the household market.
Hafs has forecast its sales in 2021 as 25000 units. Its forecasted break-even chart is shown in Figure 1.

Figure 1: Forecasted break-even chart for Hafs for 2021

Figure 1: Forecasted break-even chart for Hafs for 2021

Question 1(b)

(a)

Using Figure 1:

[ 6 ]

Question 1(b)(i)

(i)

explain what the y axis shows;

[ 2 ]

Question 1(b)(ii)

(ii)

calculate forecasted profit if sales are 25000 units in 2021 (show all your working);

[ 2 ]

Question 1(b)(iii)

(iii)

calculate the total contribution in 2021 if Hafs only sells 20000 units (show all your working).

[ 2 ]

Question 1(c)

(b)

Explain whether an increase in total fixed costs has an impact on unit contribution.

[ 2 ]

Question 1

[Maximum number: 11]

1. Belluno Frames (BF)
Image removed for copyright reasons
Belluno Frames ( B F ) manufactures high-quality frames for glasses (spectacles). Like many other firms in the private sector in northern Italy, the business is small, family-owned, and operates as a private limited company. Giovanni and Elda Rizzo own 100 \% of the shares, nherit. Giovanni designs the frames. Antonio and two employees which their son Antonio will inherit.
B F is located in a building that Giovanni and Elda own, near their house, 42 kilometres outside of Belluno. Antonio and the two employees live in the same village as B F. The road to Belluno is narrow, with traffic that moves very slowly because of farm vehicles. Antonio, who wants the business to grow, has asked his father to rent a building in the industrial park in Belluno with good road access. BF's new location would be closer to suppliers and customers. It would also improve B F 's visibility.
Currently, B F sells on average 1300 frames per month. Each frame is sold at an average price of € 24. Below are the costs (all figures in € ) for B F at its current location and if it moved to the industrial park in Belluno.
Monthly fixed costs:

Table

Variable costs per frame:

Table

Antonio believes that B F 's sales will grow on average to 1700 frames per month in the new location. To reach that level, Antonio suggests that B F offer extra financial rewards in addition to their usual salaries to employees after 1300 frames have been sold each month (the current monthly average). Giovanni and Elda are reluctant.

Question 1(b)

(a)

Calculate for B F per month at the current location (show all your working):

[ 6 ]

Question 1(b)(i)

(i)

the break-even level of output.

[ 2 ]

Question 1(b)(ii)

(ii)

the margin of safety.

[ 2 ]

Question 1(b)(iii)

(iii)

the profit or loss at the current level of 1300 frames sold.

[ 2 ]

Question 1(c)

(b)

Construct a fully labelled break-even chart for B F at the current location.

[ 5 ]

Question 1

[Maximum number: 13]

1. Calorie Count (CC)
Evana Dox has recently set up her own business, called Calorie Count (CC). She has identified a precise market segment: local middle-aged people struggling to have a healthy lifestyle because of long working hours. Customers will order meals in the morning, and in the evening Evana will deliver the meals.
Evana is converting the ground floor of her house into a professional kitchen complying with all hygiene standards and food safety regulations. She will employ her niece Athena, a graduate from a catering college. 60 % of the initial investment and start-up costs will come from Evana's personal savings; the other 40 % will be financed by external sources.
Evana has carried out secondary market research and found that the net profit margin in catering businesses of the same size is 35 %. However, for her new business Evana knows that her net profit margin will be much lower.
For her first year of operations, she aims for a net profit margin of 15 %. In the first year, she hopes to sell an average of 50 meals per day, 5 days per week. She estimates that each meal would be sold at an average price of $ 17. This price, Evana believes, will be competitive and will generate an adequate contribution per meal for her business to be successful.
CC uses a cost-based pricing strategy, with the following estimated costs:
- variable cost per meal: 70 % of selling price
- fixed cost per annum: $ 42000.

Question 1(b)

(a)

Define the term contribution.

[ 2 ]

Question 1(c)

(b)

Calculate for CC:

[ 6 ]

Question 1(c)(i)

(i)

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

[ 2 ]

Question 1(c)(ii)

(ii)

the margin of safety, if it sells 50 meals per day, 260 days per year (show all your working);

[ 2 ]

Question 1(c)(iii)

(iii)

the profit or loss, if it sells 50 meals per day, 260 days per year (show all your working).

[ 2 ]

Question 1(d)

(c)

Construct a fully labelled break-even chart, to scale, for CC.

[ 5 ]

Question 1

[Maximum number: 10]

1. Small-Scale Hobbies (SSH)
Scale Airplane Modeller is a magazine produced by Small-Scale Hobbies (SSH). The company sells the magazine through independent retail outlets in the US.
The finance director produced a summary of 2018's financial information. Last year's break-even chart showed that SSH had a margin of safety of 20000 units.

Table 1: Selected financial data for SSH for 2018:

Table 1: Selected financial data for SSH for 2018:

This year, to reduce costs and to increase sales, the company will introduce new production methods, which will reduce:
- unit variable costs by 10 %
- fixed costs by $ 5000 per year.

Question 1(a)

(a)

Define the term margin of safety.

[ 2 ]

Question 1(b)

(b)

Using the financial data in Table 1, calculate:

[ 6 ]

Question 1(b)(i)

(i)

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

[ 2 ]

Question 1(b)(ii)

(ii)

the percentage of total costs that were fixed costs for last year (show all your working);

[ 2 ]

Question 1(b)(iii)

(iii)

the level of profit for SSH at 2018's level of production (show all your working).

[ 2 ]

Question 1(c)

(c)

Explain how the introduction of new production methods will affect the total cost line in SSH's break-even chart.

[ 2 ]

Question 1

[Maximum number: 8]

1. Jill's Gloves (JG)
Jill's Gloves (JG) is a sole trader owned by Jill McAloon. The business makes and sells ski gloves. JG sells each pair of gloves for $ 20.
Jill has forecasted sales in 2022 to be 20000 units. She has also projected the fixed costs (Table 1) and variable costs (Table 2) for that year.

Table 1: Projected fixed costs for 2022

Table 1: Projected fixed costs for 2022

Table 2: Projected variable costs per pair of gloves for 2022

Table 2: Projected variable costs per pair of gloves for 2022

Jill expects a 10 % increase in her fixed costs and a 5 % increase in her variable costs in 2023.

Question 1(b)

(a)

Construct a fully labelled break-even chart, to scale, for JG for 2022.

[ 4 ]

Question 1(c)

(b)

Calculate JG's level of profit if sales are 20000 units in 2022 (show all your working).

[ 2 ]

Question 1(d)

(c)

Explain how the changes that Jill expects in fixed and variable costs in 2023 would affect the total costs line of the break-even chart from your answer to (b).

[ 2 ]

Question 2

[Maximum number: 8]

2. Moverse
Moverse operates in the health and fitness sector. Moverse is not a traditional gym with machines (equipment) and fitness instructors (trainers). The instructors themselves travel and run fitness classes in the buildings of large companies. Instructors all work part-time and are paid wages on a time rate basis.
Moverse currently sells its services to several large companies. They have a total of 727 employees enrolled on its programme.
- Moverse charges a yearly fee of $ 145 for each employee participating.
- Moverse's fixed costs are $ 60000 per year.
- The variable cost per employee taking part in the programme is $ 45.

Question 2(b)

(a)

Calculate the break-even quantity for Moverse (show all your working).

[ 2 ]

Question 2(c)

(b)

Construct a fully labelled break-even chart, to scale, for Moverse if 800 employees enroll on Moverse's training programme.

[ 4 ]

Question 2(d)

(c)

Calculate the profit or loss if 800 employees enroll on Moverse's training programme (show all your working).

Answer one question from this section.

[ 2 ]

Question 2

[Maximum number: 8]

2. DuffJD
DuffJD provides a laundry service for towels and sheets to three hotel chains in a major city, Hoyluk. It provides each hotel chain with trade credit.
Competition in this market is increasing, as two rivals are planning to offer laundry services to hotel chains in Hoyluk.

Table 1: Selected financial data for DuffJD for 2018

Table 1: Selected financial data for DuffJD for 2018

Question 2(b)

(a)

Using the financial data for DuffJD for 2018, calculate:

[ 2 ]

Question 2(b)(i)

(i)

the contribution per unit per item laundered (no working required);

[ 1 ]

Question 2(b)(ii)

(ii)

the margin of safety (no working required).

[ 1 ]

Question 2(c)

(b)

Draw a fully labelled break-even chart for DuffJD for 2018 using the data provided.

[ 4 ]

Question 2(d)

(c)

Explain how an increase in competition may affect DuffJD's margin of safety.

Answer one question from this section.

[ 2 ]

Question 2

[Maximum number: 8]

Parder

Image removed for copyright reasons

Parder manufactures ride-on (riding) lawnmowers.
Selected forecast financial data for the ride-on lawnmowers, for 2016:

Table

Question 2(b)

Question 2(b)(i)

(a)
(i)

Calculate for Parder, for 2016, the break-even level of output (show all your working).

[ 2 ]

Question 2(b)(ii)

(ii)

Construct a fully labelled break-even chart, to scale, for Parder, for 2016.

[ 4 ]

Question 2(b)(iii)

(iii)

Calculate the profit or loss if 700 ride-on lawnmowers are sold in 2016 (show all your working).

Answer one question from this section.

[ 2 ]

Question 2

[Maximum number: 8]

2. Alfombras Horizonte (AH)
Alfombras Horizonte (AH) produces natural henequen* rugs in Yucatán, Mexico, and sells them online. AH rugs are very popular among young people because of their eco-friendly materials and AH's mission statement: "We are responsible with Mother Earth for our environment and ourselves."
In 2022, A H 's costs increased, but it kept prices unchanged. For 2023, A H decided to change its pricing

Question image

strategy and pass on all cost increases to customers.

Table 2: Selected financial information for \(\boldsymbol{A

Table 2: Selected financial information for \(\boldsymbol{A

* henequen: a fibre plant from Mexico and Guatemala. Fabrics made from henequen fibre are used to make a wide variety of products, including bags, rugs and hammocks.

Question 2(b)

(a)

Using relevant information from Table 2, calculate:

[ 6 ]

Question 2(b)(i)

(i)

the break-even quantity of rugs in 2022 (show all your working);

[ 2 ]

Question 2(b)(ii)

(ii)

the profit or loss for A H if 500 rugs were sold in 2022 (show all your working);

[ 2 ]

Question 2(b)(iii)

(iii)

the margin of safety in 2023 if AH sells 750 rugs (show all your working).

[ 2 ]

Question 2(c)

(b)

Explain whether A H's change in pricing strategy for 2023 will have an impact on its unit contribution.

Answer one question from this section.

[ 2 ]
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