QUESTIONS ON CHAPTER-10 (BREAK-EVEN ANALYSIS & LIMITING FACTOR

ANALYSIS)

1. A business makes 2,000 units of a particular product. It spent £24,000 on material and it
paid its operatives £40,000. Other costs of running the factory were £50,000. The sales force
was also paid £18,000 and the head office costs were £100,000. In order to break even the
selling price per unit will have to be:

a. £32
b. £116
c. £66
d. 84

2. A business has fixed costs of £90,000 and charges a selling price of £25per unit. If the
contribution to sales ratio is 25% the break even point in units would be:

a. 14,400
b. 3,600
c. 22,500
d. 2,880

3. The following data relate to two levels of output:

10,000 units 15,000 units
Total cost £25,000 £29,500

The actual value of fixed costs assuming linearity is:

a. Cannot be ascertained from the information given

b. £25,000
c. £16,000
d. £12,000

4. A company produces a standard product, the following details are given:

February March
Sales (units) 200 350
Sales revenue £5,000 £8,750
Profit £1,000 £2,500

The break even point in units is:

a. Cannot be ascertained
b. 100 units
c. 175 units
d. 275 units
5. Limiting factor analysis refers to:

a. A situation where a business tries to substitute scarce resources to increase production

b. A situation where a business tries to maximise contribution subject to resource constraints
c. A situation where a business tries to minimise its costs
d. A situation where a business produces products that use the smallest amount of scarce
resources

6.

The following data relates to four products:

A B C D
£ £ £ £
Selling price 15.40 12.20 10.50 19.30
Labour cost at £4 per hour 8.00 4.00 6.00 8.00
Material costs at £2 per kg 4.00 3.00 1.00 4.00
Fixed costs 1.90 2.20 2.50 1.30
Profit 1.50 3.00 1.00 6.00

In a situation of scarce materials supplies the product that we would prefer to produce would be:

a. Product B
b. Product D
c. Product A
d. Product C

7. XYZ Ltd has the following alternative planned activity levels:

Level A Level B Level C

Total costs £100000 £150000 £200000

Number of units produced 5 000 10000 15000

(Fixed overhead remains constant over the activity range shown.)

The variable overhead cost per unit is:

(a) £20.

(b) £15.

(c) £13.33.
(d) £10.

8. Jackson Company produces chairs, which sell for $95 per unit. The chairs have variable costs
of $55 per unit, and the company has $230,000 of fixed costs. If the company produces and sells
8,000 units, what is its break-even point in units?

A) 2,421 units
B) 2,875 units
C) 4,182 units
D) 5,750 units

Use the information to answer questions 9-11.

9. ABC is considering a new advertising campaign which would cost $50,000. What level of sales
dollars is required for ABC to break even?

10. ABC's current level of sales revenue is based upon 10,000 units sold. ABC would like to
have a minimum net income of $40,000 after launching a new advertising campaign costing
$50,000. What level of sales dollars will be required to achieve this minimum level of net
income?

11. If ABC can decrease the variable costs 10%, what is the break-even point in sales dollars?
(Disregard the cost of a new advertising campaign)

12. Green Ltd manufactures two components, the Alpha and the Beta, using the same
machines for each. The budget for next year requires the production of 4,000 units of
each component.

The variable production cost per component is as follows:

Machine hours per unit Variable production cost (£ per

unit)
Alpha 3 20
Beta 2 36

Only 16,000 machine hours will be available next year. A sub-contractor has quoted the
following unit prices to supply components: Alpha £29; Beta £40.
 The optimum plan to obtain the components required is

Component Alpha Component Beta

Produce Units Purchase from Produce Units Purchase from
sub-contractor sub-contractor
Units
A 0 4,000 0 4,000
B 2,000 2,000 0 4,000
C 2,666 1,334 4,000 0
D 4,000 0 2,000 2,000

13. A company has only 6,000 kg of an irreplaceable raw material called Grunch. Grunch can be
used to make three possible products X, Y and Z, details of which are given below:

X Y Z

Maximum demand (units) 4,000 3,000 5,000

Constant unit selling price (£/unit) £3.00 £4.00 £5.00
Constant unit variable cost (£/unit) £1.50 £2.40 £2.60
Fixed costs (£/unit) £1.80 £2.20 £2.40
Quantity of raw material Grunch
to make one unit of product (kg) 0.30 0.40 0.80

If the company's objective is to maximise profit, which of the following production schedules
should be chosen?

X Y Z
Units Units Units
A 2,666 3,000 5,000
B 4,000 3,000 5,000
C 4,000 2,000 5,000
D 4,000 3,000 4,500