Break Even Practice Class Questions
Break Even Practice Class Questions
A local government authority owns and operates a leisure center with numerous sporting
facilities, residential accommodation, a cafeteria and a sports shop. The summer season lasts
for 20 weeks including a peak period of six weeks corresponding to the school holidays. The
following budgets have been prepared for the next summer season:
Accommodation
60 single rooms let on a daily basis.
35 double rooms let on a daily basis at 160 per cent of the single room rate.
Fixed costs £29,900.
Variable costs £4 per single room per day and £6.40 per double room per day.
Sports center
Residential guests each pay £2 per day and casual visitors £3 per day for the use of facilities.
Fixed costs £15 500.
Sports shop
Estimated contribution £1 per person per day.
Fixed costs £8250.
Cafeteria
Estimated contribution £1.50 per person per day.
Fixed costs £12 750.
During the summer season the center is open seven days a week and the following activity
levels are anticipated:
Double rooms fully booked for the whole season.
Single rooms fully booked for the peak period but at only 80 percent of capacity during the rest
of the season.
30 casual visitors per day on average.
You are required to:
a) Calculate the charges for single and double rooms assuming that the authority wishes to
make a £10,000 profit on accommodation;
b) Calculate the anticipated total profit for the leisure center as a whole for the season; (10
marks)
c) Advise the authority whether an offer of £250,000 from a private leisure company to
operate the center for five years is worthwhile, assuming that the authority uses a 10 per
cent cost of capital and operations continue as outlined above.
QUESTION 2
A private hospital is organized into separate medical units which offer specialized nursing care
(e.g. maternity unit, paediatric unit). Figures for the paediatric unit for the year to 31 May 2001
have just become available. For the year in question the paediatric unit charged patients £200
per patient day for nursing care and £4.4 million in revenue was earned.
Costs of running the unit consist of variable costs, direct staffing costs and allocated fixed costs.
The charge for variable costs such as catering and laundry are based on the number of patient
days spent in hospital. Staffing costs are established from the personnel requirements
applicable to particular level of patient days. Charges for fixed costs such as security,
administration etc. are based on bed capacity, currently 80 beds.
The number of beds available to be occupied is regarded as bed capacity and this is agreed
and held constant for the whole year. There was an agreement that a bed capacity of 80 beds
would apply to the paediatric unit for the 365 days of the year to 31 May 2001.
The table below show the variable, staffing and fixed costs applicable to the paediatric unit for
the year to 31 May 2001:
Variable costs (based on patient days) £
Catering 450,000
Laundry 150,000
Pharmacy 500,000
Total 1,100,000
Staffing costs
Each speciality recruits its own nurses, supervisors and assistants. The staffing requirements
for the paediatric unit are based on the actual patient days, see the following table:
Patient Days per Supervisors Nurses Assistants
annum
Up to 20,500 4 10 20
20,500 to 23,000 4 13 24
Over 23,000 4 15 28
During the year to 31 May 2001 the paediatric unit operated a 100% occupancy (i.e. all 80 beds
occupied) for 100 days of the year. In fact, the demand on these days was for a least 20 beds
more.
As a consequence of this, in the budget for the following year to 31 May 2002, an increase in
the bed capacity has been agreed. 20 extra beds will be contracted for the whole year. It is
assumed that the 100 beds will be fully occupied for 100 days, rather than being restricted to 80
beds on those days. An increase of 10% in employment costs for the year to 31 may 2002, due
to wage rate rises, will occur for all personnel. The revenue per patient day, all other cost factors
and the remaining occupancy will be the same as the year to 31 May 2001.
Required
(a) Determine, for the year to 31 May 2001, the actual number of patient days, the bed
occupancy percentage, the net profit/loss and the break-even number(s) of patient days
for the paediatric unit.
(b) Determine the budget for the year to 31 May 2002 showing the revised number of
patient days, the bed occupancy percentage, the net profit/loss and the number of
patient days required to achieve the same profit/loss as computed in (a) above.
QUESTION 3
Dingbat Limited is considering renting additional factory space to make two products, Thing-one
and Thing-two. You are the company’s management accountant and have prepared the
following monthly budget:
Thing- Thing-two Total
one
Sale (units) 4,000 2,000 6,000
--------------------£--------------------
Sales revenue 80,000 100,000 180,000
Variable material and labour costs (60,000) (62,000) (122,000)
Fixed production overheads (allocated on (9,900) (18,000) (27,900)
direct labour hours)
Fixed administration overheads (allocated (1,600) (2,000) (3,600)
on sales value)
Profit 8,500 18,000 26,500
The fixed overheads in the budget can only be avoided if neither product is manufactured.
Facilities are fully interchangeable between products.
As an alternative to the manual production process assumed in the budget, Dingbat Limited has
the option of adopting a computer-aided process. This process would cut variable costs of
production by 15% and increase fixed costs by £12,000 per month.
The management of Dingbat Limited is confident about the cost forecasts, but there is
considerable uncertainty over demand for the new products.
The management believes the company will have to depart from its usual cash sale policy in
order to sell Thing-two. An average of three months’ credit would be given and bad debts and
administrations costs would probably amount to 4% of sales revenue for this product.
Both products will be sold at the prices assumed in the budget. Dingbat Limited has a cost of
capital of 2% per month. No stocks will be held.
Required:
(a) Calculate the sales revenue at which operations will be break-even for each process
(manual and computer-aided);
(b) Calculate the sales revenues at which Dingbat Limited will be indifferent between the
two processes:
(i) If Thing-one alone is sold;
(ii) If Thing-one and Thing-two units are sold in the ratio 4:1, with Thing-two being
sold on credit.
QUESTION 4
Umair Limited has recently established a factory in Nowshera which will produce two products
Mori and Naga. According to the budget for the first year, the company would operate at normal
capacity of the plant which is 50,000 units of Mori and 60,000 units of Naga. The budget
prepared by the finance department for the first year includes the following projections:
Particulars Mori Naga
Price per unit - Exports Rs. 4,000 Rs. 5,200
- Local sales Rs. 4,500 Rs. 6,000
Discounts would be allowed on local sales depending upon the credit period as follows:
X type customers with 60 days credit NIL
Y type customers with 30 days credit 10%
Volume of local sales is estimated at 80% of total sales. Ratio of sales to X and Y type of
customers would be 3:2 respectively.
Production costs per unit of finished products have been budgeted as under:
Particulars Mori Naga
Raw material 5kg @ Rs. 300 per kg 10kg @ Rs. 200 per kg
Direct labour 6 hours @ Rs. 200 per 7 hours @ Rs. 250 per
hour hour
Overhead’* (30% fixed and 70% 40% of direct labour
variable)
‘* excluding ordering and holding costs of inventory
The size of raw material orders would be 30,000 kg and 40,000 kg in respect of Mori and Naga
respectively. The company would follow a policy of maintaining 5,000 units of inventory of
finished goods of each product and safety stocks of 10,000 kg for each raw material.
Administration expenses are fixed and are estimated at Rs. 28 million per annum. Selling costs
are estimated at Rs. 61 million of which 80% are variable. Variable selling costs are related to
local sales only. The variable selling expenses pertaining to Naga are 40% more than selling
expenses on Mori.
Total depreciation on all assets is estimated at Rs. 3 million which has already been
incorporated in the above costs.
In addition to the above costs, the raw material holding costs are estimated at Rs. 4 per kg per
month. The annual ordering costs are estimated at Rs. 600,000 which mostly constitute fixed
expenses as the variable costs are negligible.
Required:
Compute the break-even sales in Rupees assuming that the export orders are confirmed and
volume of local sales of Mori and Naga would maintain the ratio as per budget.
QUESTION 5
1. ARM manufactures two products (Chars and Ganja) which it sells in the Lyari Town and Kati
Pahari area.
The company has recently published its financial statements for the year ended 30 September
20X1 which show the following:
Statement of profit or loss for the year ended 30 September 20X1:
Units Rs. Rs.
Sales: Chars 1,000 410,000
Ganja 2,000 660,000
1,070,000
Cost of sales:
Raw material 260,000
Labour 350,000
Production overheads 210,000 (820,000)
Gross manufacturing profit 250,000
Less: Under-applied fixed (35,000)
overhead
Selling and administrative (125,000)
expenses
Profit 90,000
You have been requested by ARM to assist him in his plans for the forthcoming year, and to
prepare a budget that will maximise company profits.
You obtained the following information about the company:
1. There was no opening or closing stock of raw materials or finished products at the
beginning or end of the 20X1 financial year.
2. A leaf used in the manufacture of both Chars and Ganja is not freely available. The leaf
costs Rs. 20, and one leaf is required for each item. ARM has estimated that only 5,000
of these leaves will be available in the forthcoming year.
3. Other than the leaf referred to in note 2, raw materials used in the manufacture of Chars
and Ganja cost twice as much for each unit of Chars as they do for Ganja.
4. The labour cost represents a total usage of 70,000 labour hours, which can be
increased by 80% if required. Chars requires 30 hours of labour time per unit, while
Ganja requires 20 hours per unit. 50% of the labour cost of Rs. 350,000 for 20X1 was
variable. The hourly cost of utilising the 80% extra labour hours will equal the current
variable cost per hour.
5. Chars requires 20 machine hours of manufacturing time per unit, while Ganja requires
25 machine hours. During the 20X1 financial year, ARM utilised 80% of maximum
production capacity. The capacity can be utilised at 100% if required, and it was at this
level that the fixed manufacturing overhead recovery rate was set for 20X1.
6. The production overhead of Rs. 210,000 represents both variable and fixed costs. The
variable costs were incurred at the same machine hour rate for both products.
7. Selling and administrative expenses for 20X0 amounted to Rs. 100,000. In 20X0, 800
units of Chars and 1,200 units of Ganja were sold. Management has estimated that the
fixed selling and administrative expenses will increase by 10% in 20X2.
8. Changes in costs and sales for the year ending 30 September 20X2:
a) The selling price per unit for Chars will be Rs. 410; for Ganja it will be Rs. 345
per unit.
b) All variable and fixed costs will remain unchanged, except for the fixed selling
and administrative expenses detailed in note 7.
9. The demand for Chars is expected to increase by 100%, while the demand for Ganja
should increase by 50%.
10. Chars and Ganja can be imported from Afghanistan at a cost of Rs. 340 and Rs. 220 per
unit respectively.
11. You may ignore taxation for this question.
REQUIRED
(a) Prepare a budget statement of profit or loss for the year ending 30 September 20X2
that will maximise company profit. Assume that ARM will not import completed units of
Chars and Ganja from Afghanistan. (12 marks)
(b) Calculate the units of Chars and Ganja that ARM should manufacture internally if it
decided to import additional units from Afghanistan as required. (4 marks)