Question

4. Break-even analysis

To be profitable, a firm has recover its costs. These costs include both its fixed and its variable costs. One way that a firm evaluates at what stage it would recover the invested costs is to calculate how many units or how much in dollar sales is necessary for the firm to earn a profit.

Consider the case of Petrox Oil Co.:

Petrox Oil Co. is considering a project that will have fixed costs of $10,000,000. The product will be sold for $41.50 per unit, and will incur a variable cost of $11.25 per unit.

Given Petrox’s cost structure, it will have to sell ---------- units to break even on this project (QBEBE).

a. 271.084

b.386.721

c. 93,186

d. 330,579

Petrox’s marketing and sales director doesn’t think that the firm’s market is big enough for the firm to break even. In fact, she believes that the firm will be able to sell only about 175,000 units. However, she also thinks that the demand for Petrox’s product is relatively inelastic (so the firm can increase the sales price without significantly decreasing the volume of product sold). Assuming that the firm can sell 175,000 units, what price must it set to break even?

a. $82.07 per unit

b. $68.39 per unit

c. $75.23 per unit

d. $64.97 per unit

What affects the firm’s operating break-even point?

Several factors affect a firm’s operating break-even point. Based on the scenarios described in the following table, indicate whether these factors would increase, decrease, or leave unchanged a firm’s break-even quantity—assuming that only the listed factor changes and all other relevant factors remain constant.

	Increase	Decrease	No Change
The firm depreciates its fixed assets more quickly over a shorter life.
The product’s sales price increases.
The firm’s tax rate increases.

When fixed costs are high, a small decline in sales can lead to a --------- (large or small) decline in return on equity (ROE).

Answer 1

1st Correct option is d. 330579 units to breakeven.

2nd Correct option is b $68.39 per unit

3rd

		Decrease	Increase	No change
Depreciation			√ ( Increase)
Sales price increase		√ ( Decrease BEP)
Firm Tax Rate				√ No change

4) When fixed costs are high, a small decline in sales can lead to a large decline in return on equity

Break even point is the point where the contribution margin recover all the fixed cost associated with the project , above that Quantity company will able to make profit , below that company will be at loss.

At Break even point Fixed cost is Equal to Contribution

Formula for Break even point = Total Fixed acost ÷ Contribution Margin per unit

Contribution margin per unit = Swlling price per unit - Variable cost per unit

=41.50 -11.25

=30.25 per unit

Breakeven point =$10,000,000 ÷30.25 =330578.51 ie 330579 unit

2) As we Know at Breakeven point Product make no profit no loss and At that point Fixed cost is Equal to total Contribution margin

So Total Contribution Margin at BEP = $10,000,000

So Contribution Margin per unit at given Sales unit =$10,000,000÷175000

=57.14

Contribution margin per unit = Selling price - Variable cost per unit

Hence selling price = Contribution margin + Variable Cost

=57.14+11.25

SP=68.39 per unit

3) Effect on Break even sales due to various factor.

i) Frequency of depreciation will increase the fixed cost as the depreciation on Equiptment are the product cost as Equipment are used for making the product hence are included in product cost under depreciation . As fixed cost increasing , more unit will be Required to cover the additional fixed cost.

ii) Sale price increase will cost increase in contribution , as more comtribution is there to cover fixed cost lesser Quantity will be require to cover the fixed cost.

iii) Income tax are charge for income and are not the production cost and are not the part of product cost , hence will have no effect on BEP unit . And At BEP profit will be nil has there will be no Tax .

4) If Fixed cost are to high a small fluctuation in sales will not be able to cover that expenses , as fixed expenses will incurred regardless of the sales revenue.

As fixed cost is high and revnue is also decrease the net income will drlecrease . Which cause reduction in Return on equity. As contribution is decrease but fixed expenses are continuously occuring will cause decrease un profit .