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Read the information supplied and answer the questions which follow - Leaving Cert Business - Question B - 2016

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Read the information supplied and answer the questions which follow. Medron plc has supplied the following financial information for the new medical device: Foreca... show full transcript

Worked Solution & Example Answer:Read the information supplied and answer the questions which follow - Leaving Cert Business - Question B - 2016

Step 1

(i) Breakeven point

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Answer

To calculate the breakeven point (BEP), we use the formula:

BEP=Fixed CostsSelling Price−Variable CostsBEP = \frac{\text{Fixed Costs}}{\text{Selling Price} - \text{Variable Costs}}

Substituting the values:

BEP=400,00030−20=400,00010=40,000 unitsBEP = \frac{400,000}{30 - 20} = \frac{400,000}{10} = 40,000 \text{ units}

Thus, the breakeven point is 40,000 units.

Step 2

ii) Margin of safety at the forecast output

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The margin of safety (MoS) can be calculated using the formula:

MoS=Forecast Output−BEPMoS = \text{Forecast Output} - BEP

Substituting the known values:

MoS=60,000−40,000=20,000 unitsMoS = 60,000 - 40,000 = 20,000 \text{ units}

Thus, the margin of safety at the forecast output is 20,000 units.

Step 3

iii) Profit at forecast output

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To find the profit at the forecast output, we can use the formula:

Profit=Total Revenue−Total Costs\text{Profit} = \text{Total Revenue} - \text{Total Costs}

First, we calculate Total Revenue (TR):

TR=Selling Price×Forecast Output=30×60,000=1,800,000 eurosTR = \text{Selling Price} \times \text{Forecast Output} = 30 \times 60,000 = 1,800,000 \text{ euros}

Then, we calculate Total Costs (TC):

TC=Fixed Costs+(Variable Costs×Forecast Output)=400,000+(20×60,000)=400,000+1,200,000=1,600,000 eurosTC = \text{Fixed Costs} + (\text{Variable Costs} \times \text{Forecast Output}) = 400,000 + (20 \times 60,000) = 400,000 + 1,200,000 = 1,600,000 \text{ euros}

Now, calculating the profit:

Profit=1,800,000−1,600,000=200,000 euros\text{Profit} = 1,800,000 - 1,600,000 = 200,000 \text{ euros}

Therefore, the profit at the forecast output is 200,000 euros.

Step 4

(i) Calculate the new breakeven point and illustrate on your breakeven chart the new total cost line (TC2) and the new breakeven point (BE2)

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With the new variable costs decreased to €10, we recalculate the breakeven point (BEP):

BEP=Fixed CostsSelling Price−Variable Costs=400,00030−10=400,00020=20,000 unitsBEP = \frac{\text{Fixed Costs}}{\text{Selling Price} - \text{Variable Costs}} = \frac{400,000}{30 - 10} = \frac{400,000}{20} = 20,000 \text{ units}

Now, for illustration purposes on the breakeven chart:

  • The new total cost line (TC2) should be drawn starting from the same fixed cost and sloping at the new variable cost rate.
  • The intersection of the new total cost line (TC2) with the total revenue line indicates the new breakeven point (BE2) at 20,000 units.

Step 5

ii) Outline one limitation of a breakeven analysis

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One limitation of breakeven analysis is that it assumes fixed costs remain constant, while in reality, fixed costs can vary due to changes in business operations or scale. For instance, a business might incur additional fixed costs when expanding or downsizing, making the breakeven analysis less reliable in such scenarios.

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