Questions on Break Even Analysis
PRACTICE QUESTIONS ON BREAK-EVEN ANALYSIS
1. A small firm intends to increase the capacity of a bottleneck operation by adding a new machine. Two alternatives, A and B, have been identified and the associated costs and revenues have been estimated. Annual fixed costs would be $40,000 for A and $30,000 for B; variable costs per unit would be $10 for A and $12 for B; and revenue per unit would be $15 for A and
$16 for B.
a) Determine each alternative’s break-even point in units.
b) At what volume of output would the two alternatives yield the same profit?
c) If expected annual demand is 12,000 units, which alternative would yield the higher profit?
2. A manager must decide how many machines of a certain type to purchase. Each machine can process 100 customers per hour. One machine will result in a fixed cost of $2,000 per hour while two machines will result in a fixed cost of $3,800 per hour. Variable costs will be $20 per customer and revenue will be $45 per customer.
a) Determine the break-even point for each scenario.
b) If estimated demand is 90 to 120 customers per hour, how many machines should be purchased? 3. Manufacturing Inc. (MI) is considering the following two alternative technologies, differing in terms of their fixed and variable costs, for producing its new product.
ALTERNATIVE A
Total
Variable
Fixed
Cost per
Cost/yr ($) unit ($)
300,000
8
750,000
6
Output Range/year
0-200,000
200,000-400,000
ALTERNATIVE B
Total
Variable
Fixed
Cost per
Cost/yr ($) unit ($)
300,000
6
800,000
8
Output
Range/year
0-200,000
200,000-400,000
Variable Costs: For annual production volumes between 0-200,000 units, the VC/unit is $8 and
$6 for Alternatives A and B, respectively. For annual production volumes between 200,000
400,000 units, the VC/unit of $6 for Alternative A applies to all units produced, including the first 200,000 units, but the VC/unit of $8 for Alternative B applies to only those units produced in excess of 200,000.
Fixed Costs: For Alternative A the
1. A small firm intends to increase the capacity of a bottleneck operation by adding a new machine. Two alternatives, A and B, have been identified and the associated costs and revenues have been estimated. Annual fixed costs would be $40,000 for A and $30,000 for B; variable costs per unit would be $10 for A and $12 for B; and revenue per unit would be $15 for A and
$16 for B.
a) Determine each alternative’s break-even point in units.
b) At what volume of output would the two alternatives yield the same profit?
c) If expected annual demand is 12,000 units, which alternative would yield the higher profit?
2. A manager must decide how many machines of a certain type to purchase. Each machine can process 100 customers per hour. One machine will result in a fixed cost of $2,000 per hour while two machines will result in a fixed cost of $3,800 per hour. Variable costs will be $20 per customer and revenue will be $45 per customer.
a) Determine the break-even point for each scenario.
b) If estimated demand is 90 to 120 customers per hour, how many machines should be purchased? 3. Manufacturing Inc. (MI) is considering the following two alternative technologies, differing in terms of their fixed and variable costs, for producing its new product.
ALTERNATIVE A
Total
Variable
Fixed
Cost per
Cost/yr ($) unit ($)
300,000
8
750,000
6
Output Range/year
0-200,000
200,000-400,000
ALTERNATIVE B
Total
Variable
Fixed
Cost per
Cost/yr ($) unit ($)
300,000
6
800,000
8
Output
Range/year
0-200,000
200,000-400,000
Variable Costs: For annual production volumes between 0-200,000 units, the VC/unit is $8 and
$6 for Alternatives A and B, respectively. For annual production volumes between 200,000
400,000 units, the VC/unit of $6 for Alternative A applies to all units produced, including the first 200,000 units, but the VC/unit of $8 for Alternative B applies to only those units produced in excess of 200,000.
Fixed Costs: For Alternative A the