BREAK EVEN QUESTIONS
1. B/E Question
Hips & Co produces a product that sells for R40.00 per unit. Variable costs to manufacture and sell
the unit amount to R30.00 per unit. Fixed costs and expenses are going to amount to R50,000 per
period.
a) Calculate the break-even point in Sales.
b) Calculate the pre-tax profits to be expected on sales of R400,000.
c) Calculate the sales required to produce a pre-tax profit of R40,000.
d) Calculate the sales revenue required to produce an after tax profit of R20,000 if the tax rate is
25%.
e) If the company wished to increase the after tax profit by R5,000 what increase in sale revenue
is required?
f)
If basic salaries to the sales personnel were to be increased by R4,000, calculate the
increase in sales that would be required in order to cover the increase.
g) The sales manger believes that sales revenue can be increased by R80,000 if he is given
additional funds for a sales promotion. What is the maximum amount that he may be allowed
to spend so that the company does not lose money on the promotion?
2. B/E Question
Tools and Co
Income statement for the year ended 31 July 2012
Sales
1,500,000
% of sales
100%
Variable expenses
Cost of goods
Commissions
Royalties
Transport
Cash discounts
Consumables
1,161,000
1,005,000
60,000
75,000
12,000
3,000
6,000
77.4%
67.0%
4.0%
5.0%
0.8%
0.2%
0.4%
Gross profit
339,000
22.6%
Fixed expenses
Depreciation
Insurance
Rent
Manager's salary
Wages
Electricity & water
Equipment hire
Subscriptions
Advertising
309,000
10,000
20,000
60,000
80,000
63,600
5,400
16,000
15,000
39,000
Net profit before tax
30,000
Complete the following:
1. What would be the effect on the 2013 net profit of Tools & Co if the sales increased by 20%
while the ratio of variable expenses to sales and the amount of fixed expense remained
unchanged?
2. What would be the effect on the 2013 net profit if the existing manager were to retire and was
replaced by a new manager for a salary of R60,000 per year? (Apply this information to this
question only).
3. What could sales decline to before operations resulted in a net loss, assuming that the ratio of
variable expenses to sales and the amount of fixed expense remained unchanged?
4. If Tools & Co wanted to achieve a net profit of R100,000 in 2013 and all the other factors are
expected to behave as they did in 2012, what sales would be needed?
5. What would the break-even (expressed in sales) be if the gross profit percentage were
reduced from 22.6% to 20%?