Section 3 Break-Even Analysis

Section 3 Break-Even Analysis 1) Fixed costs are those costs that continue even if no units are produced. Answer: TRUE Diff: 2 Objective: LO4 Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and manufacturing processes 2) Break-even analysis identifies the volume at which fixed costs and revenue are equal. Answer: FALSE Diff: 2 Key Term: Break-even analysis AACSB: Reflective thinking skills Objective: LO4 Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and manufacturing processes 3) Break-even analysis is a powerful analytical tool, but is useful only when the organization produces a single product. Answer: FALSE Diff: 2 Key Term: Break-even analysis Objective: LO4 Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and manufacturing processes 4) Break-even is the number of units at which: A) total revenue equals price times quantity. B) total revenue equals total variable cost. C) total revenue equals total fixed cost. D) total profit equals total cost. E) total revenue equals total cost. Answer: E Diff: 2 Key Term: Break-even analysis Objective: LO4 Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and manufacturing processes 5) Which of the following statements regarding fixed costs is TRUE? A) Fixed costs rise by a constant amount for every added unit of volume. B) While fixed costs are ordinarily constant with respect to volume, they can "step" upward if volume increases result in additional fixed costs. C) Fixed costs are those costs associated with direct labor and materials. D) Fixed costs equal variable costs at the break-even point. E) Fixed cost is the difference between selling price and variable cost. Answer: B S7-15 Diff: 2 AACSB: Reflective thinking skills Objective: LO4 Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and manufacturing processes 6) Which of the following costs would be incurred even if no units were produced? A) raw material costs B) direct labor costs C) transportation costs D) building rental costs E) purchasing costs Answer: D Diff: 2 AACSB: Reflective thinking skills Objective: LO4 Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and manufacturing processes 7) Basic break-even analysis typically assumes that: A) revenues increase in direct proportion to the volume of production, while costs increase at a decreasing rate as production volume increases. B) variable costs and revenues increase in direct proportion to the volume of production. C) both costs and revenues are made up of fixed and variable portions. D) costs increase in direct proportion to the volume of production, while revenues increase at a decreasing rate as production volume increases because of the need to give quantity discounts. E) All of the above are assumptions in the basic break-even model. Answer: B Diff: 3 Key Term: Break-even analysis Objective: LO4 Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and manufacturing processes 8) Fabricators, Inc. wants to increase capacity by adding a new machine. The fixed costs for machine A are $90,000, and its variable cost is $15 per unit. The revenue is $21 per unit. What is the break-even point for machine A? A) $90,000 dollars B) 90,000 units C) $15,000 dollars D) 15,000 units E) 4,286 units Answer: D Diff: 2 Key Term: Break-even analysis AACSB: Analytic skills Objective: LO4 Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and manufacturing processes S7-16 9) Break-even analysis can be used by a firm that produces more than one product, but: A) the results are estimates, not exact values. B) the firm must allocate some fixed cost to each of the products. C) each product has its own break-even point. D) the break-even point depends upon the proportion of sales generated by each of the products. E) None of these statements is true. Answer: D Diff: 2 Key Term: Break-even analysis 10) The basic break-even model can be modified to handle more than one product. This extension of the basic model requires: A) price and sales volume for each product. B) price and variable cost for each product, and the percent of sales that each product represents. C) that the firm have very low fixed costs. D) that the ratio of variable cost to price be the same for all products. E) sales volume for each product. Answer: B Diff: 2 Key Term: Break-even analysis Objective: LO4 Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and manufacturing processes 11) A product sells for $5, and has unit variable costs of $3. This product accounts for $20,000 in annual sales, out of the firm's total of $60,000. When performing multiproduct break-even analysis, what is the weighted contribution of this product? A) 0.133 B) 0.200 C) 0.40 D) 0.667 E) $1.667 Answer: A Diff: 2 AACSB: Analytic skills Objective: LO4 Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and manufacturing processes 12) ________ analysis finds the point at which costs equal revenues. Answer: Break-even Diff: 1 Key Term: Break-even analysis Objective: LO4 Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and manufacturing processes S7-17 13) ________ cost is the cost that continues even if no units are produced. Answer: Fixed Diff: 2 Objective: LO4 Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and manufacturing processes 14) Multiproduct break-even analysis calculates the ________ of each product, ________ it in proportion to each product's share of total sales. Answer: contribution; weighting Diff: 3 Key Term: Break-even analysis Objective: LO4 Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and manufacturing processes 15) Define . Answer: Fixed costs are those that continue even if no units are produced. Diff: 2 Objective: LO4 Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and manufacturing processes 16) Define . What special assumption is made about variable costs in the textbook? Answer: Variable costs are those that vary with the number of units produced. Linearity (or proportionality) is assumed. Diff: 2 AACSB: Reflective thinking skills Objective: LO4 Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and manufacturing processes 17) How is break-even analysis useful in the study of the capacity decision? What limitations does this analytical tool have in this application? Answer: Breakeven is defined as the volume for which costs equal revenue. It is useful to know the break-even point for each capacity alternative under consideration. In reality, costs may not be as linear as they are assumed to be in this model. Diff: 2 Key Term: Break-even analysis AACSB: Reflective thinking skills Objective: LO4 Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and manufacturing processes 18) A product is currently made in a process-focused shop, where fixed costs are $9,000 per year and variable cost is $50 per unit. The firm sells the product for $200 per unit. What is the break-even point for this operation? What is the profit (or loss) on a demand of 200 units per year? Answer: BEP = 60 units; TR = $40,000, TC = $19,000, therefore Profit = $21,000. Diff: 2 S7-18 Key Term: Break-even analysis AACSB: Analytic skills Objective: LO4 Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and manufacturing processes 19) A product is currently made in a process-focused shop, where fixed costs are $8,000 per year and variable cost is $40 per unit. The firm currently sells 200 units of the product at $200 per unit. A manager is considering a repetitive focus to lower costs (and lower prices, thus raising demand). The costs of this proposed shop are fixed costs = $24,000 per year and variable costs = $10 per unit. If a price of $80 will allow 400 units to be sold, what profit (or loss) can this proposed new process expect? Do you anticipate that the manager will want to change the process? Explain. Answer: Old: TR = $40,000, TC = $16,000, therefore Profit = $24,000. New: TR = $80 × 400 = $32,000, TC = $24,000 + $10 × 400 = $28,000, for a profit of $4,000. Most will say NO; the larger repetitive process is less profitable than the smaller process-focused shop. Diff: 2 AACSB: Analytic skills Objective: LO4 Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and manufacturing processes 20) A firm sells two products. Product R sells for $20; its variable cost is $6. Product S sells for $50; its variable cost is $30. Product R accounts for 60 percent of the firm's sales, while S accounts for 40 percent. The firm's fixed costs are $4 million annually. Calculate the firm's break-even point in dollars. Answer: The contribution for product R is 70 percent of selling price, or 0.70; the contribution for product S is 0.40. The weighted contribution for R is .70 × .60 = .42; the weighted contribution for S is .40 × .40 = .16. The sum of the weighted contributions is 0.58. The break-even point is $4,000,000 / 0.58 = $6,896,552. Diff: 3 Key Term: Break-even analysis AACSB: Analytic skills Objective: LO4 Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and manufacturing processes 21) A graphic design studio is considering three new computers. The first model, A, costs $5000. Model B and C cost $3000 and $1000 respectively. If each customer provides $50 of revenue and variable costs are $20/customer, find the number of customers required for each model to break even. Answer: A: BEP = 5000/(50-20) = 166.7 customers B: BEP = 3000/(50-20) = 100 customers C: BEP = 1000/(50-20) = 33.3 customers Diff: 2 Key Term: Break-even analysis AACSB: Analytic skills Objective: LO4 Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and manufacturing processes S7-19 22) A firm is considering adding a second secretary to answer phone calls and make appointments. The cost of the secretary will be $10/hour and she will work 200 hours each month. If each new client adds $400 of profit to the firm, how many clients must the secretary arrange for the firm to break even? Answer: BEP= 10(200)/(400) = 5 clients per month Diff: 2 Key Term: Break-even analysis AACSB: Analytic skills Objective: LO4 Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and manufacturing processes 23) A local business owner is considering adding another employee to his staff in an effort to increase the number of hours that the store is open per day. If the employee will cost the owner $4,000 per month and the store takes in $50/hour in revenue with variable costs of $15/hour, how many hours must the new employee work for the owner to break even? Answer: BEP = 4000/(50 - 15) = 114.3 hours Diff: 2 Key Term: Break-even analysis AACSB: Analytic skills Objective: LO4 Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and manufacturing processes S7-20 24) A firm produces three products in a repetitive process facility. Product A sells for $60; its variable costs are $20. Product B sells for $200; its variable costs are $80. Product C sells for $25; its variable costs are $15. The firm has annual fixed costs of $320,000. Last year, the firm sold 1000 units of A, 2000 units of B, and 10,000 units of C. Calculate the break-even point of the firm. The firm has some idle capacity at these volumes, and chooses to cut the selling price of A from $60 to $45, believing that its sales volume will rise from 1000 units to 2500 units. What is the revised break-even point? Answer: Calculations for the original version of this problem are: Selling Variable Percent of Weighted price P cost V V/P 1-V/P Sales sales contrib. $60 $20 .333 .667 $60,000 .0845 .0564 $200 $80 .400 .600 $400,000 .5634 .3380 $25 $15 .600 .400 $250,000 .3521 .1408 $710,000 1.0000 0.5352 The original break-even for this firm was $320,000/.5352 = $597,907. This is a calculator-based result; Excel reports $597,895 Product A B C When the price of A is reduced, the revised calculations are: Selling Variable Percent of Weighted Product price P cost V V/P 1-V/P Sales sales contrib. A $45 $20 .444 .556 $112,500 .1475 .0820 B $200 $80 .400 .600 $400,000 .5246 .3148 C $25 $15 .600 .400 $250,000 .3279 .1312 $762,500 1.0000 0.5280 The firm's breakeven point has increased to $320,000 /.5280 = $606,061. (Calculator-based; Excel reports $606,211). Diff: 3 Key Term: Break-even analysis AACSB: Analytic skills Objective: LO4 Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and manufacturing processes S7-21 25) A firm produces three products. Product A sells for $60; its variable costs are $20. Product B sells for $200; its variable costs are $120. Product C sells for $25; its variable costs are $10. Last year, the firm sold 1000 units of A, 2000 units of B, and 10,000 units of C. The firm has fixed costs of $320,000 per year. Calculate the break-even point of the firm. Answer: Calculations for this problem are: Product A B C Selling Variable Percent of Weighted price P cost V V/P 1-V/P Sales sales contrib. $60 $20 .333 .667 $60,000 .0845 .0564 $200 $120 .600 .400 $400,000 .5634 .2254 $25 $10 .400 .600 $250,000 .3521 .2113 $710,000 1.0000 .4931 Break-even for this firm is $320,000/.4931 = $648,956. Note: this result reflects calculator rounding, as students might experience at exam time. Excel reports $649,143. Diff: 3 Key Term: Break-even analysis AACSB: Analytic skills Objective: LO4 Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and manufacturing processes S7-22