Q1. Is Namib Tyres breaking even?
Namib Tyres Ltd produces motorcycle tyres. The following information about the
business has been obtained:
• Fixed costs are $30 000 per year.
• Variable costs are $5 per unit.
• Each tyre is sold for $10.
• Maximum output is 10 000 tyres per year
Read the case study above.
a. Copy this table and fill in the missing figures
Sales ($) = 0 units Sales ($) = 10000 units
Fixed cost 30,000 30,000
Variable cost 0 50,000
Total cost 30,000 80,000
Revenue 0 100,000
b. Draw a break-even chart from the information in the table.
c. From your break-even chart identify:
• the break-even level of output
6000 units
• the level of profit at maximum output.
Profit=total revenue - total cost
100000 - 80000 = $20,000
Q2. Molly has decided to open a takeaway pizza shop in her local town. She has
calculated the average variable cost of producing each pizza will be $1. Molly
estimates her fixed costs per week will be $600. Molly plans to sell her pizza at $2.50
each. She has worked out the maximum number of pizzas she could produce is 800
per week.
Molly carried out a market research before setting up her business. She estimates
that she will be able to sell 600 pizzas a week.
1. Use the information above to draw a breakeven chart for Molly’s business.
2. Find the following
a. Revenue= $1500
b. Fixed cost=$600
c. Variable cost=$800
d. Total costs=$1400
Q3. In a sports shoe business we will assume that:
• fixed costs are $5000 per year
• the variable costs of each pair of shoes are $2
• each pair of shoes is sold for a price of $8
• the factory can produce a maximum output of 2000 pairs of shoes per year
Sales ($) =0 units Sales ($) =500 Sales ($) =2000
units units
Fixed cost 5000 5000 5000
Variable cost 0 1000 4000
Total cost 5000 6000 9000
Revenue 0 4000 16000
a. Draw a new break-even chart to show an increase in variable costs to $6 per
pair of shoes as a result of the manager buying expensive materials. and
[The manager increases the price by $12 per pair of shoes.]
b. Compare your break-even chart with the one showing the increase in selling
price. Would you advise the manager to raise the price of shoes or to use cheaper
raw materials?
Based on a $2 variable cost and a $8 selling price, the original scenario's break-even
point, as shown by the break-even charts, was 833 units. Thus means that 833 units
had to be sold for the business to break even and turn a profit. However, the
break-even figure dropped significantly to 357 units after the selling price was raised
to $20. Despite the potential rise in variable expenses, the company was able to
reach profitability considerably more quickly by using the higher price to cover
expenses with fewer sales. Given this, increasing the selling price lowers the
quantity of units required to break even and has a significant beneficial impact on the
company's financial health.
While using cheaper raw materials could lower costs, it may risk the product’s
quality. Therefore, based on the break even analysis, it would be better to raise the
price rather than compromise on material quality.
