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    BA Problems 2

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    rassa
    The document discusses break-even point (BEP) in economics and investing, and provides examples of how to calculate BEP for a restaurant and furniture factory. It also covers make-or-buy decisions and constrained resources. The key points are: 1) BEP is the point where revenues equal expenses or where gains equal losses. 2) To calculate BEP, fixed costs are divided by the contribution margin per unit to determine the number of units that must be sold to cover costs. 3) Make-or-buy decisions should consider only relevant variable costs to determine if manufacturing internally or purchasing externally has a lower total cost.

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    BA Problems 2

    Uploaded by

    rassa
    12 views6 pages
    The document discusses break-even point (BEP) in economics and investing, and provides examples of how to calculate BEP for a restaurant and furniture factory. It also covers make-or-buy decisions and constrained resources. The key points are: 1) BEP is the point where revenues equal expenses or where gains equal losses. 2) To calculate BEP, fixed costs are divided by the contribution margin per unit to determine the number of units that must be sold to cover costs. 3) Make-or-buy decisions should consider only relevant variable costs to determine if manufacturing internally or purchasing externally has a lower total cost.

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    The document discusses break-even point (BEP) in economics and investing, and provides examples of how to calculate BEP for a restaurant and furniture factory. It also covers make-or-buy decisions and constrained resources. The key points are: 1) BEP is the point where revenues equal expenses or where gains equal losses. 2) To calculate BEP, fixed costs are divided by the contribution margin per unit to determine the number of units that must be sold to cover costs. 3) Make-or-buy decisions should consider only relevant variable costs to determine if manufacturing internally or purchasing externally has a lower total cost.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    12 views6 pages

    BA Problems 2

    Uploaded by

    rassa
    The document discusses break-even point (BEP) in economics and investing, and provides examples of how to calculate BEP for a restaurant and furniture factory. It also covers make-or-buy decisions and constrained resources. The key points are: 1) BEP is the point where revenues equal expenses or where gains equal losses. 2) To calculate BEP, fixed costs are divided by the contribution margin per unit to determine the number of units that must be sold to cover costs. 3) Make-or-buy decisions should consider only relevant variable costs to determine if manufacturing internally or purchasing externally has a lower total cost.

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    I.

    Break-even point (BEP)

    Economics: BEP is the point at which revenues equal expenses.

    Investing: BEP is the point at which gains equal losses.

    How it works?

    Calculate the point at which revenues begin to exceed costs.

    1)The first step is to separate a company’s costs into those that are variable and those that are fixed.

    Example of fixed costs: rent, insurance premiums, loan payments.

    Variable costs – are costs that change with the quantity of output. They are zero when production is
    zero.

    Examples of variable costs: raw materials, labor directly involved in a company’s manufacturing
    process.

    Problem:

    Restaurant Max sells only pepperoni pizza with the following cost structure:

    Fixed costs (per month) Variable costs (per


    unit)
    General labor 1500 $ Flour 0,50 $
    Rent 3000 $ Yeast 0,05 $
    Insurance 200 $ Water 0,01 $
    Advertising 500 $ Cheese 3,00 $
    Utilities 450 $ Pepperoni 2,00 $
    Total 5650 $ Total 5,56 $

    Based on the total variable expenses per pizza, we know that Max must price its pizzas at 5,56 $ or
    higher, just to cover those costs.

    But if Max charges 10 $ for each pizza, then it would receive 4,44 $ per pizza to contribute to the fixed
    costs and ultimately, the restaurant overall profits.

    How many pizzas does Max need to sell at 10 $ per unit to cover all the fixed monthly expenses?

    We divide fixed costs (5650 $) to 4,44 $ left over after the variable costs are covered.

    5650: 4,44 = 1272 pizzas


    Max must sell 1272 pizzas in order to break- even for the month. Each pizza sold after that contributes
    to the bottom line.

    Note: It is important to note that some fixed costs increase “stepwise”, meaning that after a certain level
    of revenue is reached, the fixed cost changes.

    For example, if Max began selling 5000 pizzas per month rather than just 2000, it might need to hire a
    second manager, thus increasing labor costs.

    II. Break-even point in algebraic terms

    Q = F/(P-v)

    Q = break-even quantity;

    F= fixed costs

    P = selling price

    v= variable cost per unit

    Suppose we have:

    F=1200 $

    P=40 $

    V=15 $

    Q = 1200/ (40-15) = 48 units

    Sales price per unit – variable costs per unit = contribution margin per unit

    BEP (in units) = Fixed costs/contribution margin per unit

    →compares the total amount of units that must be sold in order for the company to generate enough
    revenue to cover all expenses.

    BEP (in dollars) = Sales price per unit X BEP in units

    →expresses the total amount of sales that we need to achieve in order to have zero loss and zero profit.

    If we need to achieve a certain level of profitability, then:

    Desired profit ($)/Contribution margin per unit + BEP in units = Number of units needed to produce
    the desired profit
    Problem

    Jane is the managerial accountant in charge of a large furniture factory’s lines. She isn’t sure the
    furniture year’s models are going to turn a profit and wants to measure the number of units they will
    have to produce and sell in order to cover their expenses and make 200.000 $ in profits.

    The stats are:

    Total fixed costs 500.000 $


    Variable costs per unit 300 $
    Sales price per unit 500 $
    Desired profits 200.000 $

    1)Calculate BEP in units:

    500.000/ (500-300) = 2.500 units

    2)Calculate BEP in $:

    2500 X 500 = 1.250.000 $

    3)Compute the total number of units that must be produced in order to meet 200.000 $ profitability
    goal.

    (Profitability goal/Contribution margin) + BEP in units

    200.000/ (500-300) + 2500 = 3500 units

    The difference between 3500 units (to meet the desired profits) and 2500 units (to cover the factory
    expenses) is 1000 units = the margin of safety

    The margin of safety is the amount of sales the company can afford to lose, but still covers its
    expenditures.
    Make-or-Buy

    Problem

    Company Claire is manufacturing bearings for cars. The business accounting section reports the
    following expenses for manufacturing 8.000 bearings internally:

    Direct materials 6$ 8000 48.000 $


    Direct labor 4$ 32.000 $
    Supervisor salary 3$ 24.000 $
    Variable overhead 1$ 8.000 $
    Allocated general 5$ 40.000 $
    overhead
    Depreciation of special 2$ 16.000 $
    equipment
    Total expense 21 $ 168.000 $

    Company X offered to sell 8.000 bearings to Claire for only 19 $ per bearing.

    Should Claire make or buy the bearings?

    Look at the RELEVANT COSTS!

    Criteria:

    1)NOT SUNK !! (a sunk cost should never influence a future decision)

    2)Differential cost (difference between my options/alternatives)

    MAKE BUY
    Direct materials : 6 $ 48.000
    Direct labor : 4$ 32.000
    Supervisor : 3 $ 24.000
    Variable overhead : 1$ 8.000
    Total : 14 $ 112.000 19X8.000 = 152.000
    Make-or-buy decisions and opportunity costs

    Company Clark makes bracelets at 4 dollars variable cost per unit. Bracelets are then incorporated into
    mass-production jewelry. Clark makes 100.000 bracelets per year.

    Company Flamenco offers to sell the bracelets to Clark for 5 dollars/bracelet (variable cost). The
    structure of costs for both companies is:

    Costs Make Buy


    Variable per unit 4$ 5$
    Fixed - total 200.000 150.000
    Total 600.000 650.000

    Clark decides to rent part of his production capacity to X for 70.000 $ per year. What should then Clark
    decide in terms of make-or-buy bracelets?

    Constrained resources

    Problem 1

    Jim’s Cakes makes tasty treats for events. Jim has only one employee. His business is successful, but Jim
    has not enough time to fill all his orders.

    The company sells 3 products: wedding cakes, birthday cakes and cupcakes.

    Wedding Birthday Cupcake


    Selling price 400 $ 40 $ 5$
    Variable cost 160 15 2,25
    Contribution margin 240 25 2,75
    CM (%) 60% 62,5% 55%
    Hours to make 20 2 0,20

    In terms of making money, which order makes the best use for Jim’s time? (time is constrained
    resource)

    Wedding = 240/20 = 12$/hour (3)

    Birthday = 25/2 – 12,5$/hour (2)

    Cupcake = 2,75/0,20 = 13,75$/hour (1)


    Constrained resources

    Problem 2

    Company Gloria has 3 lines of perfumes: Red, Green and Blue. After Julia Roberts tweeted that this was
    her favorite line of perfumes, demand for all three products has been off the charts. The company has a
    problem: it has a limited supply of orchid nectar – a common ingredient in perfumes.

    Orchid nectar costs 5 dollars per gram and is the major selling feature of R-G-B perfumes. Cost data are:

    Red Green Blue


    Price 200 160 80
    Variable expenses
    -orchid nectar 50 30 20
    -other direct materials 15 25 15
    -direct labor 20 25 10
    Variable manufacturing 15 10 10
    overhead
    Total variable costs 100 90 55
    Contribution margin 100 70 25
    (CM)

    a)Which product would you recommend Gloria to manufacture?

    b)what is the maximum the company should be willing to pay for 1 gram of orchid nectar?

    The best use of resource = CM/unit of constrained resource

    If you buy the resource, the number of grams would be:

    50/5 = 10

    30/5 = 6

    20/5 = 4

    CM 100 70 25
    CM/gram 100/10=10 70/6 =11,67 25/4=6,25

    b)11,67 $/gram

    we already pay 5 $, so there is room for 11,67+5= 16,67 $/gram (break-even point)

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