Limitations of break-even analysis
-Fixed costs are likely to change at different activity levels. A stepped fixed cost line is
more accurate.
-Variable costs and sales are unlikely to be linear due to discounts, overtime payments.
- More suitable for short term planning and not long term planning.
1. False assumptions: the break even analysis is based on the following false assumptions.
- Proportionate change in variable costs.
- Segregation of costs into fixed and variable components.
2. Growth condition un-assumed. Break – even analysis does not assume condition of growth in an organization, whereas in real life an organization’s operations undergo a continuous process of growth and expansion.
3. Determination of optimum sales – mix. The application of break – even analysis to multi – product firm is very difficult.
4. Short – run analysis. Break – even analysis is essentially a short – run analysis because it is based on the break – down of costs into fixed and variable costs and in the long – run all costs are variable.
5. Static nature. Break – even analysis is static in nature as it is based on historical costs thus; it is of limited use for companies undergoing rapid changes.
marto answered the question on February 22, 2019 at 07:06
- State the methods that a company can use to determine the break-even point or the output needed
to achieve a target operating income.(Solved)
State the methods that a company can use to determine the break-even point or the output needed
to achieve a target operating income.
Date posted: February 22, 2019. Answers (1)
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sufficient spare capacity to undertake additional contracts.
Additional information:
1. The company absorbs...(Solved)
Urembo Ltd. Produces and sell a wide range of homecare detergents. Currently the company has
sufficient spare capacity to undertake additional contracts.
Additional information:
1. The company absorbs production overhead using a rate of 200% on direct wages. The rate is
derived from the following budgeted figures:
Sh.
3. Urembo Ltd has a purchase order to supply Watalii Restaurant with 4,000 units of ,fresh'
beauty soap at Sh.32 each.
4. If the purchase order is accepted the normal budgeted sales of Urembo Ltd. Would be
affected adversely.
Required:
(i). Advise the management of urembo Ltd on whether to accept the purchase order from
Watalii Restaurant
(ii). Explain the principles that you have applied in arriving at the conclusion in (b) (i) above.
Date posted: February 22, 2019. Answers (1)
- Maridadi limited a privately owned company, specializes in the manufacture of these products
namely, hair combs, hair rollers and hair bands.
For the financial year commencing 1...(Solved)
Maridadi limited a privately owned company, specializes in the manufacture of these products
namely, hair combs, hair rollers and hair bands.
For the financial year commencing 1 August 2008, the sales manager has prepared the following
two possible sales forecasts:
3. Direct labour cost will be restricted to a maximum of sh. 250,000 in the period. This is
assumed that labour is of the same grade and is freely transferable between products
4. Other resources are expected to be available
Required:
i. Identify the principal budget factor
ii. Calculate the sales budget mix that you would recommend to maximize profit
iii. Compute the maximum profit that could be generated by Maridadi limited.
Date posted: February 22, 2019. Answers (1)
- Rangi limited, a paint manufacturer produces two types of plant namely 'gloss' and 'Shine'
The following information relates to the company?s projections for the year ending...(Solved)
Rangi limited, a paint manufacturer produces two types of plant namely 'gloss' and 'Shine'
The following information relates to the company‟s projections for the year ending 31 December
2008.
Required:
i. Compute the break-even point of Gloss in units and break-even point of „Shine” in
shillings
ii. Given that customers purchase composite units of sox for 'Gloss' and four for 'Shine'
calculate composite unit contribution margin.
iii. Given that customers purchase composite units of six for 'Gloss' and one litre of 'Shine'
calculate the composite contribution margin ratio.
iv. Determine the break even sales in shillings assuming that 'Gloss and Shine' become
components and that there is no change in the company's cost.
Date posted: February 22, 2019. Answers (1)
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extracted from the budgets and standard costs to product “Zed”.(Solved)
ABC limited manufactures and sells a single product branded 'Zed'. The following data has been
extracted from the budgets and standard costs to product 'Zed'.
Date posted: February 22, 2019. Answers (1)
- Westlife company limited manufacturers three products X, Y, and Z
The following data relating to the products is provided(Solved)
Westlife company limited manufacturers three products X, Y, and Z
The following data relating to the products is provided
Required:
i. Optimal production mix that would result in the maximum profit
ii. Forecast ed profits statement using the optimal production mix in (b) (i) above
Date posted: February 22, 2019. Answers (1)
- Reality Company Ltd. has increased its output from 12,900 kilogrammes (kg) in year 2008 to 17,300
kilogrammes (kg) in year 2009. Data for its four products...(Solved)
Reality Company Ltd. has increased its output from 12,900 kilogrammes (kg) in year 2008 to 17,300
kilogrammes (kg) in year 2009. Data for its four products in the year 2009 are as follows:
Additional information:
1. Labour is scarce and cannot be increased by more than 5% of the company's existing capacity.
2. Fixed overheads are absorbed on the basis of direct labour cost.
3. Visionary company Ltd. Has offered to supply 2,000 kilogrammes of product B at a final price of
90% of reality Company Ltd.s selling price.
4. The extra capacity created will enable reality Company Ltd to produce extra units of product A.
Required:
(a) Determine whether Reality Company Ltd. should accept the offer from Visionary Company Ltd.
(b) Assuming that Reality Company Ltd. decides to outsource in order to create extra capacity,
determine the best product to outsource among the four products.
(c) Highlight four factors to consider before discontinuing the production of a product.
Date posted: February 22, 2019. Answers (1)
- Leisure Enterprises is in the process of determining the viability of a concert in Nairobi.
The following information shows the estimated cost of the concert:
1. Estimated...(Solved)
Leisure Enterprises is in the process of determining the viability of a concert in Nairobi.
The following information shows the estimated cost of the concert
1. Estimated fixed costs are Sh. 600,000
2. Variable costs are Sh. 100 per ticket sold
3. The proposed price for the sale of a ticket is Sh. 200
4. The expected sales are 8,000 tickets
Required:
i) Number of tickets that must be sold to break-even
ii) Number of tickets that be sold to earn a target profit of Sh. 300,000
iii) The profit that would be realized if 8,000 tickets are sold
iv) The selling price to be charged to earn a profit of Sh. 300,000 on sale of 8,000 tickets, fixed
costs of Sh. 600,000 and variable costs of Sh. 100 per ticket.
v) Percentage margin of safety
Date posted: February 22, 2019. Answers (1)
- Highlight six limitations of cost-volume-profit analysis.(Solved)
Highlight six limitations of cost-volume-profit analysis.
Date posted: February 22, 2019. Answers (1)
- Describe the difference between the accountant's and the economist's model of cost-volume profit
analysis.(Solved)
Describe the difference between the accountant's and the economist's model of cost-volume profit
analysis.
Date posted: February 22, 2019. Answers (1)
- PQR limited is a manufacturer of sports shoes. The company uses a standard system. The standard
cost per pair of spots shoes is as follows:(Solved)
PQR limited is a manufacturer of sports shoes. The company uses a standard system. The standard
cost per pair of spots shoes is as follows:
Additional information
1. During the month of March 2011, production was 10,000 units as planned but he sales made
were 8,000 units
2. The total fixed production overhead variance during the month was sh. 100,000 adverse
3. The standard fixed production overhead absorption rate was based on a budgeted activity of
10,00 units
4. There was no opening stock at the beginning of the month
5. All units were sold at the standard selling price
6. Other costs incurred during the month were as follows:
Required:
a) Income statement for the month of March 2011 using
i. Absorption costing
ii. Marginal costing
b)
i. Explain the reason why the income statement under absorption costing shows a different
profit or loss figure compared with the income statement under marginal costing.
ii. Reconciliation statement of the difference between the profit or loss under absorption
costing and marginal costing in (a) above
Date posted: February 22, 2019. Answers (1)
- Highlight six advantages of break-even charts.(Solved)
Highlight six advantages of break-even charts.
Date posted: February 21, 2019. Answers (1)
- Daiton Ltd. manufactures four products; AA, BB, CC and DD. The budgeted income statement for the
month of June 2012 is as follows:(Solved)
Daiton Ltd. manufactures four products; AA, BB, CC and DD. The budgeted income statement for the
month of June 2012 is as follows:
Required;
a) Calculate the shortfall in the hours available.
b) Rank the products in order of priority based on the contribution per hour.
c) Advise the management on the most profitable product mix.
d) The management of Daiton Ltd. is considering whether to discontinue the manufacture of product
BB which is' expected to realize a loss in June 2012.
Advise the management whether product BB should be discontinued from production, citing two
reasons for your advice.
Date posted: February 21, 2019. Answers (1)
- Jino Ltd. produces four products namely; A, B, C and D. The following are the firm's budgeted
figures for the month of July 2013(Solved)
Jino Ltd. produces four products namely; A, B, C and D. The following are the firm's budgeted
figures for the month of July 2013
Additional Information:
1. Material costs is sh. 10 per kilogramme and the maximize firm has a total of 500 kilogramme
2. Labour is paid at sh. 10 per hour and is limited to 360 hours
Required;-
a) Determine the limiting factor
b) Calculate the production mix that would maximize profit for the month
Date posted: February 21, 2019. Answers (1)
- Agnes Kaseo and Peter Poah, decided to venture into the same business in the year 2012. They
sell the same type product in the same type...(Solved)
Agnes Kaseo and Peter Poah, decided to venture into the same business in the year 2012. They
sell the same type product in the same type of market.
They have provided the following budgeted income statement for the year ending 30 June 2014:
Required:
Income statement for the month of April 2013 using:
i) Absorption costing.
ii) Marginal costing
Date posted: February 21, 2019. Answers (1)
- Neb Ltd. manufactures three products namely; A, B and C which use the same inputs but in
different quantities.
In addition to these inputs, each unit of...(Solved)
Neb Ltd. manufactures three products namely; A, B and C which use the same inputs but in
different quantities.
In addition to these inputs, each unit of product C uses a component MT200 which the company
currently purchases from an external supplier for Sh.80 per unit.
The following estimated data relates to the month of January 2014:
Additional information:
1. The monthly fixed costs amount to Sh. 150,000.
2. The company has reverse engineered the component MT200 and has realized that it could make
the component in-house at the following costs per unit:
Sh.
3. In the month of January 2014, the maximum availability of skilled labour is 5,400 hours but all
other resources are readily available
4. There would be no incremental fixed costs incurred as a result of making the component in house.
5. The company bases all short-term decisions on profit maximization.
6. The company would either buy the component or make it in-house; it would not use a mixture of
the two options:
Required:
Advise the management of Neb Ltd. on the optimal production plan for the month of January 2014.
Date posted: February 21, 2019. Answers (1)
- Tec Ltd. manufactures a single product branded 'Zed' for sale on the local and international
market.
The cost structure per unit of product 'Zed' is as follows:(Solved)
Tec Ltd. manufactures a single product branded 'Zed' for sale on the local and international
market.
The cost structure per unit of product "'zed' is as follows:
Additional information:
1. The current sales level for the company amounts to Sh. 800,000.
2. The fixed overheads per unit have been calculated based on the current sales level of 4,000
units.
Required:
i) Sales price per unit.
ii) Current profit or loss.
iii) Break even point in units and shillings.
iv) Suggest four measures that could be taken to improve the current profit position
Date posted: February 21, 2019. Answers (1)
- Wanga Ltd. manufactures a wide range of products. The company has approached you for advice
on an order for a product branded 'Venzo'. This is a...(Solved)
Wanga Ltd. manufactures a wide range of products. The company has approached you for advice
on an order for a product branded "Venzo". This is a one-off order.
The costs associated with the order are as follows:
Additional information:
1. Material A: The cost of Sh.10 per kilogramme is the original purchase cost incurred several
years ago. This material is no longer in use by the business and if not used for this order, it
would be sold as scrap at Sh.3 per kilogramme.
2. Material B: This is in continuous use by the business. The historical cost of the material was
Sh.7 per litre although current supplies are being purchased at Sh.6.50 per litre.
3. Material C: Wanga Ltd. has 600 kilogrammes of this material in stock and new supplies
would cost Sh 4 per kilogramme. If the current stock of this material is not used for the order,
it would be used as a substitute for Material Z which cost Sh.7 per kilogramme in another
production process. 2 kilogrammes of Material Care substituted with I kilogramme of
Material Z.
4. Department X: This department has spare labour capacity sufficient for the order which
would be retained within the department.
5. Department Y: This department is currently working at full capacity. The existing staff could
either work overtime to complete the order, paid at 150% of normal rate or Wanga Ltd. could
divert labour hours from the production of other units that currently average a contribution of
Sh.3 per labour hour.
6. Overheads: These are absorbed at a pre-determined rate. There will be no incremental costs
incurred as a result of accepting this order.
Required:
i. Advise the management of Wanga Ltd. on the minimum price that they should accept
for product 'Venzo'.
ii. Justify your treatment of each cost as either relevant or irrelevant as applicable in
each case.
Date posted: February 21, 2019. Answers (1)
- Tamu Ltd. manufactures three products namely; Exe, Wye and Zed. The following information
relates to the company's budget for the first quarter of the financial year...(Solved)
Tamu Ltd. manufactures three products namely; Exe, Wye and Zed. The following information
relates to the company's budget for the first quarter of the financial year ending 31 December
2015:
Additional information;-
1. The above budget is based on full production capacity.
2. The factory manager proposes that if the whole production capacity was used to produce each
product in turns, then at any given time, 24 units of Exe, 12 units of Wye and 9 units of Zed could
be manufactured and that production switching costs would be negligible.
3. The sales manager reports that the maximum sales will be as follows:
Date posted: February 21, 2019. Answers (1)
- Sifa Ltd. manufactures and sells a single product. The following information regarding the
company for the year ended 31 October 2014 is provided:(Solved)
Sifa Ltd. manufactures and sells a single product. The following information regarding the
company for the year ended 31 October 2014 is provided:
The following changes are expected to occur during the year ending 31 October 2015:
1. Variable selling and distribution expenses will reduce by 5% due to increased efficiency of the
sales staff.
2. Variable overheads will increase by 3%.
3. Labour cost will reduce by 4%.
4. Material cost will increase by 2% due to inflation.
5. Selling price will reduce by 3% in order to attract customers.
6. No stock is expected at the end of the period.
Required;-
i) Expected break even sales for the year ending 31 October 2015.
ii) Expected margin of safety in sales value for the year ending 31 October 2015.
iii) Expected sales value at which a profit of Sh.2, 250,000 will be realised.
iv) A summary of the operating statement to show net profit in (b) (iii) above.
Date posted: February 21, 2019. Answers (1)