Tutorial 2

1) The break-even quantity of output is that quantity of output, in units, that results in an EBIT
equal to zero.
2) The break-even point is equal to

A) fixed costs divided by (sales price per unit - variable cost per unit).
B) fixed costs divided by unit variable costs.
C) fixed costs divided by selling price per unit.
D) (sales price per unit - variable cost per unit) times the fixed costs.

3) HomeCraft makes wooden play sets. The company pays annual rent of $400,000 per year and
pays administrative salaries totaling $150,000 per year. Each play set requires $400 of wood, ten
hours of labor at $70 per hour, and variable overhead costs of $100. Fixed advertising expenses
equal $100,000 per year. Each play set sells for $3,200. What is HomeCraft's break-even output
level?

A) 340 play sets

B) 325 play sets
C) 297 play sets
D) 258 play sets
4) Based on the data contained in Table A, what is the break-even point in units produced and
sold?

TABLE A

Average selling price per unit $18.00

Variable cost per unit $13.00

Units sold 400,000

Fixed costs $650,000

Interest expense $50,000

A) 130,000
B) 140,000

C) 150,000
D) 180,000

5) Based on the data contained in Table A, what is the break-even point in sales dollars?
A) $2,340,000

B) $1,850,000
C) $1,775,500
D) $2,520,000

1 2 3 4 5
T A B B D

1) Voellers Upholstery Co. produces inexpensive leather chairs. The average selling price for one
of the chairs is $400. The variable cost per chair is $250. Voellers has average fixed costs per year
of $450,000.
a. What is the break-even point in units?
b. What is the break-even point in dollar sales?
c. What would be the operating profit or loss associated with the production and sale of

(1) 3,000 chairs, (2) 4,000 chairs?

2 ABC Corp. has estimated the following income statement for its next fiscal year.

Sales $20,000,000

Variable costs 6,000,000

Revenue before fixed

costs 14,000,000

Fixed costs 9,000,000

EBIT 5,000,000

Interest expense 900,000

Earnings before taxes 4,100,000

Taxes (35%) 1,435,000

Net income $2,665,000

3) Techno Robots produces a functioning toy robot. At a production and sales level of 10,000
robots, the firm has the following information:
What is the break-even point in units for the firm?

Suppose a Corporation has decided in favor of a capital restructuring that

involves increasing its existing $5 million in debt to $25 million. The interest
rate on the debt is 12 percent and is not expected to change. The firm currently
has 1 million shares outstanding, and the price per share is $40. If the
restructuring is expected to increase the ROE, what is the minimum level for
EBIT that GNR’s management must be expecting? Ignore taxes in your answer.