Break-Even Point Course Works Samples For Students

Introduction:

Operating leverage refers to the amount of fixed costs a company has. Here the term fixed costs can be referred to as fixed operating expenses such as, rent for the office premises, lease payments etc. Important to note, that, the greater operating leverage has higher variability on the operating earnings of the company as most of the costs involved are fixed
In the accounting and finance literature, the degree of operating leverage is calculated as the percentage change in operating income (EBIT) that results from a given change in percentage of sales.

However, even this performance measurement tool has associated ...

1) The new process by McDonald’s helps to deliver fresher hamburgers to its customers. Unlike the old make-to-stock process, where hamburgers were prepared before customers placed orders, the new process allows hamburgers to be assembled after the order is placed. The key elements of the new system are the use of technology for storing ingredients and the response time of 15 seconds. Despite the improvement in hamburger freshness achieved with the new process, McDonald’s hamburgers are still not the freshest. Wendy’s is using a slower process, in which hamburger is cooked from raw ingredients after the order ...

1.) Break-even analysis is an important tool, which helps to define the level of sales needed for the company to break even. The basic formula for calculating the break-even point is (fixed costs)/(selling price – variable cost per unit), however in some instances this formula is further adjusted for noncash items, in order to evaluate the break even position from the cash flow prospective only. The independent variables in this calculation are selling price as well as fixed and variable costs, while the dependent variable is the level of sales, needed to break even. This relatively easy ...

1. Why is using the cost of equity to discount project cash flows inappropriate when a firm uses both debt and equity in its capital structure?

The cost of equity is inappropriate as it fails to correctly show the company’s cost of financing. The most appropriate discount rate should reveal the both the cost of debt and the equity financing of the company, given that capital as a resource, has a cost linked to it.

2. Why would a project that reaches the break-even point in terms of net income potentially be bad for shareholders?

For a project to be acceptable, it must ...

Unit:

Solution to the Question

When fixed price is 1,000,000

Number of workers= 50,000

Workers daily wage=80

Other variable cost= 400,000

Therefore Total variable cost= (50000*80) + 400, 000

=4,400,000

Units of Output per day=200,000

Therefore, Average Variable Cost=4,400,000 / 200,000

=22

Average total cost= (4,400,000+1,000,000) /200,000

=27

Work productivity= 200, 000 / 50,000

=4
When the fixed price is at 1,000,000, the total cost per unit is $27. Considering the firm sells the output at $25 per unit, and then at this fixed cost, the firm is making a loss of $2 per unit.

When the fixed cost is at 3,000,000

Total variable cost=4,400,000 (calculated in part a)

Average variable cost =22 (calculated in part a)

Average total cost= (4,400,000+3,000,000) / 200,000

=37

Work productivity=4 (calculated in part a)

Advise: When the fixed cost is at $ ...