Break-Even Analysis Exercise1. Diana is considering setting up an Italian cake shop. The cost of making an Italian cake is $12 each and they are sold at $28 each. In addition, Diana also has other monthly expenses as well: rent ($500), electricity ($240) and wages ($700).

How many Italian cakes must Diana sell in every month to just cover all her expenses?

Profit earned per cake = $28 - $12 = $16Total Expenses = $500 + $240 + $700 = $1440Total Expenses/Profit earned per cake = $1440/$16 = 90 cakes.

Diana has to sell 90 cakes just to cover all her expenses.

2. Thomas is planning to start his own pirated DVD shop. He will purchase his DVDs from a supplier at a cost of $2.50 each and sell them for $12. His estimated monthly costs include rent ($1000) and utilities ($200).

a)    What is the contribution per unit of DVD?$12-$2.50 = $9.50 per unit

b)    Determine the break-even point for DVDs. ($1000 +$200)/$9.50 = 126 units of DVDs.

c)    How much sales revenue must Thomas make to achieve break-even point?126 units of DVDs x 12 months = 1512 units of DVDs1512 units of DVDs x $9.50 =$14364Thomas needs to sell at least 1512 unit of DVDs, which means he has to earn $14364 to achieve break-even point.

d)    If Thomas wants to achieve an annual profit of $24000, how many DVDs must he sell each month?$24000/12 = $2000$ 2000/$9.50 = 211$ 1200/$9.50 = 126Thomas needs to sell 337 units of DVDs each month to achieve an annual profit of $24000.

e)    Thomas wants to provide each DVD with a protective case at cost $0.50. If he does this, determine the annual sales unit to achieve his annual profit.

      Profit per DVD = $12- $2.50 - $0.50 = $9.00      $24000 / $9.00 = 2667 units

$1200 x 12 = $14400$14400/9 = $1600$2667 + $1600 = $4267Thomas needs to sell 4267 units per year to achieve his goal. 

3. Warren is considering on selling 1 of the 2 following products: Ipad 2 or Galaxy Tab. The cost and selling prices for these 2 products are as follows:

New Ipad Galaxy TabSelling Price $1800 $1480Cost Price $1120 $970

Warren’s business is expected to incur a monthly fixed cost of $40,000. He also intends to make an annual profit of $600,000.

A) Based on the information given above, calculate the units that Warren needs to sell to achieve his monthly profit, if:

i) He chose to sell the New Ipad   Profit earned per unit = $1800 - $1120 = $680Break Even Point = $40,000/ $680 = 59 unitsTarget Profit Made per month = $600,000/12 = $50,000Units needed to be sold to achieve goal = $50,000/$680 = 74 units.

BEP + Units needed to be sold to achieve goal = 59 units + 74 units = 133 units.

Warren needs to sell 133 units in order to achieve his monthly profit.

ii) He chose to sell the Galaxy Tab

Profit earned per unit = $1480 - $970 = $510Break Even Point = $40,000/ $510 = 78 unitsTarget Profit Made per month = $600,000/12 = $50,000Units needed to be sold to achieve goal = $50,000/$510 = 98 units.

BEP + Units needed to be sold to achieve goal = 78 units + 98 units = 176 units.

Warren needs to sell 176 units in order to achieve his monthly profit.

B) Based on the answer from part (a), which product do you think Warren should sell? Give your reason. What other factors should you consider before deciding? Discuss.

I think Warren should sell The New Ipad. The profit gained per Ipad is larger than Galaxy Tab, this makes him more easier to achieve his goal. Besides, many people would want to buy it, which means Ipad is very popular and has a large size of market.

4. Jones Ltd. needs a specific component to make its products. The component could either be produced internally for $15 per unit or purchased from a third party for $20 per unit. At the moment, the business has spare capacity. What should Jones Ltd. do? Why?

Jones Ltd. should produce internally since it has spare capacity. So that Jones Ltd. can reduce the cost needed to produce the goods and also earn some profit by selling their products at a higher price to other parties.