BREAK EVEN ANALYSIS BASIC ACCOUNTING

1. Break-Even Analysis Exercise
1. Diana is considering setting up an Italian cake shop. The cost of making an
Italian cake is $12 each and they are sold at $28 each. In addition, Diana also
has other monthly expenses as well: rent ($500), electricity ($240) and wages
($700).
How many Italian cakes must Diana sell in every month to just cover all her
expenses?
(500+240+700)/ (28-12) = 90 cakes per month
2. Thomas is planning to start his own pirated Blu Ray shop. He will purchase
his Blu Rays from a supplier at a cost of $2.50 each and sell them for $12. His
estimated monthly cost include rent ($1000) and utilities ($200).
a) What is the contribution per unit of disc?
12.00 – 2.50 = $9.50
b) Determine the break-even point for Thomas.
1200 / 9.50 = 126 Blu Rays per month
c) How much sales revenue must Thomas make to achieve break-even point?
126 X 12 = $1512
d) If Thomas wants to achieve an annual profit of $24000, how many discs must
be sell each month?
(2000 + 1200) / 9.50 = 337 Blu Rays discs per month
e) Thomas wants to provide each Blu Ray with a protective case at extra cost of
$0.50 per unit. If he does this, determine the annual sales unit to achieve his
annual profit.
(14400 + 24000) / (9.50 – 0.50) = 4267 discs per year
3. Warren is wandering on selling 1 of the 2 following products: iPud or Galaxy
Tub. The cost and selling prices for these 2 products are as follows:
iPud Galaxy Tub
Selling Price $1800 $1480
Cost Price $1120 $970
Warren’s business is expected to incur a monthly fixed cost of $40,000. He
also intends to make an annual profit of $600,000.
a) Based on the information given above, calculate the units that Warren
needs to sell to achieve his monthly profit, if:
i) He chose to sell the iPud
(40000 + 50000) / (1800 – 1120) = 132 iPud
ii) He chose to sell the Galaxy Tub
(40000 + 50000) / 510 = 176 Galaxy Tub
b) Based on the answer from part (a), which product do you think Warren
should sell? Give your reason what other factors should you consider
before deciding? Discuss.

2. iPud, because Warren need to sell only 132 units to achieve his target
profit. Other factors including popularity, price expensive causing less
demand.
4. Jones Ltd. needs a specific component to make its products. The component
could either be produced internally for $15 per unit or purchased from a third
party for $20 per unit. At the moment, the business has spare capacity. What
should Jones Ltd. do? Why?
Jones Ltd. should do by themselves because it would be cheaper and they
can make full use of their capacity since they have spare capacity.
5. Maven Co. makes and sell fruit baskets. The selling price and variable cost
are $35 and $14 respectively for each fruit basket. The business has no spare
capacity at the moment. It has been approached by an event management
company to make extra-sized fruit baskets or $55 each (for an event). The
variable cost is $20 each. Since the Maven Co. has no spare capacity, each
extra-sized basket it produce will result in loss of contribution from its normal
fruit basket.
Should Maven Co. accept the offer? Why or why not?
Yes, he should accept the offer because it has a higher contribution compared
to its original ones.
OR
No, because they will lose their loyal customers due to not producing the
normal-sized fruit basket.