Break-Even Analysis (DP IB Business Management: HL): Exam Questions

1 hour22 questions
12 marks

Case Study

Himalayan Trekking Ltd operates guided mountaineering expeditions in Nepal. HTL's management is analysing its fixed and variable costs to determine minimum participant numbers needed for each expedition.

Define the term 'variable costs'.

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22 marks

Case Study

Global Spice Trading Ltd sources and processes speciality spices for restaurants worldwide. GST is reviewing its pricing strategy and wants to be sure that it will make a profit. Its finance manager is intending to carry out a break even analysis.

Define the term 'break-even analysis'.

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32 marks

Case Study

Swiss company Eco-Pack Solutions manufactures biodegradable packaging. Its finance team is analysing sales data to understand their financial performance and will carry out a break even analysis.

State two components of break-even analysis.

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42 marks

Case Study

Contribution is an essential financial concept in break-even analysis, especially for global businesses like CacaoPlus Ltd, a Swiss chocolate exporter.

Define the term 'contribution'.

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52 marks

Case Study

Maple Technologies Ltd, a Canadian manufacturer of smart home devices, uses break-even charts to visualise their cost structure, identify the margin of safety and determine profitability.

Define the term 'margin of safety'.

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62 marks

Case Study

Tropical Juices Ltd is launching a new organic drink and wants to understand its break-even point to decide production targets. They have calculated their fixed costs and contribution per unit for this purpose.

State two benefits of calculating the break-even point.

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72 marks

Case Study

In 2024, SunGlo Solar Ltd, a Namibian renewable energy company, uses break-even analysis to evaluate the financial feasibility of expanding its operations into Asia. However, their management recognises that break-even analysis has some limitations.

State two limitations of break-even analysis.

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82 marks

Case Study

GreenGarden, a producer of eco-friendly garden tools, uses break-even analysis in its production planning.

Describe one benefit for a business of using break-even analysis.

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16 marks

Case Study

ActiveKids Academy runs extracurricular activity clubs for children, offering gymnastics, dance, and martial arts classes. The academy’s current goal is to expand to a new location, which will require significant investment in equipment and rent.

The company estimates the following costs and revenues for the expansion:

Fixed costs

£45,000 per year, including rent and instructor salaries

Variable costs

£12 per student, covering equipment and utilities

Revenue

£40 per student per session

ActiveKids Academy plans to use break-even analysis to determine how many students it must enrol to cover its costs. Stakeholders, including investors, are particularly interested in the profitability and margin of safety for this new venture.

Analyse two benefits and one limitation of ActiveKids Academy including break-even analysis in its business plan.

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24 marks

Case Study

ActiveKids Academy runs extracurricular activity clubs for children, offering gymnastics, dance, and martial arts classes. The academy’s current goal is to expand to a new location, which will require significant investment in equipment and rent.

The company estimates the following costs and revenues for the expansion:

Fixed costs

£45,000 per year, including rent and instructor salaries

Variable costs

£12 per student, covering equipment and utilities

Revenue

£40 per student per session

ActiveKids Academy plans to use break-even analysis to determine how many students it must enrol to cover its costs. Stakeholders, including investors, are particularly interested in the profitability and margin of safety for this new venture.

Describe two limitations of break-even analysis for ActiveKids Academy.

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34 marks

Case Study

PureTaste Catering provides bespoke catering services for weddings, corporate functions, and private events. To meet growing demand, the company is evaluating how to achieve its annual profit target of £50,000 while covering its costs.

PureTaste’s cost structure is:

  • Fixed costs: £80,000 annually, including rent, utilities, and staff salaries.

  • Variable costs: £15 per guest.

  • Revenue: £50 per guest.

Management is also analysing how fluctuations in variable costs, such as ingredient prices, could impact its profit margins and overall financial performance.

Explain one advantage and one disadvantage of PureTaste setting a target profit for the year.

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44 marks

Case Study

PureTaste Catering provides bespoke catering services for weddings, corporate functions, and private events. To meet growing demand, the company is evaluating how to achieve its annual profit target of £50,000 while covering its costs.

PureTaste’s cost structure is:

  • Fixed costs: £80,000 annually, including rent, utilities, and staff salaries.

  • Variable costs: £15 per guest.

  • Revenue: £50 per guest.

Management is also analysing how fluctuations in variable costs, such as ingredient prices, could impact its profit margins and overall financial performance.

Describe two impacts of an increase in fixed costs on PureTaste Catering’s financial performance.

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54 marks

Case Study

PetFit operates exercise and agility centres for dogs, charging £30 per session. The company plans to open a new facility in a neighbouring town and is evaluating how to maintain profitability while managing fixed and variable costs.

The new facility’s costs are:

  • Fixed costs: £60,000 annually for rent, staff salaries, and insurance.

  • Variable costs: £10 per session.

PetFit’s management also wants to analyse its margin of safety to assess financial risks and determine strategies to increase customer attendance.

Explain one advantage and one disadvantage of analysing the margin of safety for PetFit’s new facility.

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66 marks

Case Study

PetFit operates exercise and agility centres for dogs, charging £30 per session. The company plans to open a new facility in a neighbouring town and is evaluating how to maintain profitability while managing fixed and variable costs.

The new facility’s costs are:

  • Fixed costs: £60,000 annually for rent, staff salaries, and insurance.

  • Variable costs: £10 per session.

PetFit’s management also wants to analyse its margin of safety to assess financial risks and determine strategies to increase customer attendance.

Analyse two advantages and one disadvantage of increasing the price per session for PetFit’s services.

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7a2 marks

Case Study

Sunny Panels installs solar panels for homeowners who want to save on electricity bills. Each solar panel system is sold for $5,150. The company spends a lot on advertising and training its workers, which increases its fixed costs. However, its variable costs are kept low because it buys parts in bulk.

Selected Financial Data for 2024

Amount ($)

Fixed Costs

1,010,200

Variable Cost per Solar Panel System

2,150

Target Profit

200,100

Calculate the break-even level of output for Sunny Panels Ltd (show all your working).

7b2 marks

Calculate the margin of safety for Sunny Panels Ltd if it produces and sells 520 solar panels (show all your working).

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82 marks

Case Study

ComfyTees makes cotton t-shirts for teenagers and young adults. The company focuses on simple, comfortable designs that are sold in shops and online. Each t-shirt is priced at $24.50. ComfyTees has recently increased its advertising budget to attract more customers. The company plans to sell 22,000 t-shirts this year.

Selected Financial Data for 2024

Amount ($)

Fixed Costs

299,100

Variable Cost per T-shirt

10.25

Planned Output (in units)

22,000

Using the planned output, calculate ComfyTees’ target profit for 2024 (show all your working).

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92 marks

Case Study

Sunny Panels installs solar panels for homeowners who want to save on electricity bills. Each solar panel system is sold for $5,150. The company spends a lot on advertising and training its workers, which increases its fixed costs. However, its variable costs are kept low because it buys parts in bulk.

Selected Financial Data for 2024

Amount ($)

Fixed Costs

1,010,200

Variable Cost per Solar Panel System

2,150

Target Profit

200,100

Calculate the number of solar panel systems Sunny Panels needs to sell to achieve a target profit of $200,100 (show all your working).

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102 marks

Case Study

BrightLights Ltd. makes energy-saving light bulbs for homes and small businesses. The company prides itself on offering affordable and eco-friendly products. BrightLights has invested in new machinery, which has increased its fixed costs but helps keep its variable costs low. The company plans to sell 25,000 light bulbs this year and aims to achieve a target profit of $50,000.

Selected Financial Data for 2024

Amount

Fixed costs

$210,750

Variable cost per lightbulb

$8.40

Target profit

$50,000

Planned output

25,000 units

Calculate the target price per light bulb for BrightLights Ltd. (show all your working).

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112 marks

Case Study

SkyView Drones sells drones for taking photos and videos. These drones are popular with photographers and small businesses. Each drone is sold for $2,490. The company has to cover fixed costs like rent and salaries, and the cost of materials for making drones adds to the variable costs. SkyView Drones expects to sell 381 drones this year.

Selected Financial Data for 2024

Amount ($)

Fixed Costs

$498,700

Variable Cost per Drone

$1,180

Selling Price per Drone

$2,490

Break even point

350

Using the forecast sales, calculate the expected profit for SkyView Drones in 2024 (show all your working).

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122 marks

Case Study

SkyView Drones sells drones for taking photos and videos. These drones are popular with photographers and small businesses. Each drone is sold for $2,490. The company has to cover fixed costs like rent and salaries, and the cost of materials for making drones adds to the variable costs. SkyView Drones expects to sell 381 drones this year.

Selected Financial Data for 2024

Amount ($)

Fixed Costs

$498,700

Variable Cost per Drone

$1,180

Selling Price per Drone

$2,490

Break even point

350

Calculate the change in the break even point if variable costs increase to $1,340 (show all your working).

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110 marks

Case Study

ActiveKids Academy provides extracurricular activity clubs for children, offering classes in gymnastics, dance and martial arts. Established eight years ago, the academy has built a strong reputation among parents for providing high-quality instruction and a safe, supportive environment for child,dren. The academy’s mission is “To inspire confidence, fitness and fun through extracurricular activities”

The academy currently operates in two locations and is planning to expand to a third. The new location will allow the business to reach more families and offer more classes. However, this expansion will require significant investment. The costs include renting the new facility, purchasing equipment, such as gymnastics mats and martial arts gear, and hiring qualified instructors

ActiveKids Academy estimates the following costs and revenue for the new location:

  • Fixed costs (e.g. rent and salaries): $45,000 per year

  • Variable costs (e.g. equipment and utilities): $12 per student per session

  • Revenue: $40 per student per session

To decide whether the expansion is financially viable, the academy is using a breakeven analysis. This will help determine how many students need to enrol each year to cover all costs. The management team is also considering ways to increase the margin of safety to ensure the venture is profitable even if student numbers fluctuate

In the past, ActiveKids Academy has used a variety of promotional strategies to attract customers. Social media campaigns targeting parents in local communities have been highly effective, especially when combined with short-term offers such as discounted enrolment fees for new students. Partnerships with local schools have also been successful, with the academy hosting free taster sessions at school events. However, other strategies, such as print advertisements in local newspapers, have not been as successful, as they generated few enrolments when compared to the costs involved

For the new location, the academy plans to focus on promotions that directly engage parents and children. Free trial sessions will allow potential customers to experience the classes first-hand. Loyalty programmes, such as discounts for repeat enrolments or siblings being enrolled, are also being considered. To measure success, the academy will track key metrics, including enrolment numbers during promotions and conversion rates from trial sessions

The academy plans to promote the new location by combining elements of the marketing mix. Its product strategy will focus on offering popular and high-demand classes, such as gymnastics and dance, while introducing new classes such as yoga for kids. Pricing will remain competitive to attract parents, but premium classes with smaller group sizes may be offered at higher rates. Promotion will include free trial sessions, targeted social media ads and partnerships with local schools to build awareness

ActiveKids Academy’s stakeholders, including investors, are keen to understand the profitability of this new venture. Management is preparing a forecast to show the expected revenue, costs and breakeven point, as well as ideas for improving profitability over time

Table 1: Estimated costs and revenue for the new location

Metric

Value ($)

Fixed costs

45,000

Variable cost per student

12

Revenue per student

40

Table 2: Financial forecast (first year)

Metric

Amount

Expected revenue ($)

85,000

Total costs ($)

73,000

Margin of safety (number of students)

200

Table 3: Market research results

Aspect

%

Insight

Parents interested in new classes

75

Strong demand for gymnastics and dance

Parents who prefer flexible pricing

60

Interest in discounts for multiple siblings

Parents likely to attend trial sessions

50

High potential for promotional events

Examine two strategies ActiveKids Academy could use to lower its breakeven point for the new location.

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210 marks

Case Study

EcoHabitat Homes designs and builds eco-friendly modular housing. The company operates from a single location in Canada and employs 12 staff members, including one engineer, one designer and four production operatives. EcoHabitat is committed to providing sustainable housing solutions, using recycled materials and energy-efficient designs to meet customer needs

The company’s modular homes are designed for eco-conscious families, small property developers and commercial clients, such as schools and offices. Customers value EcoHabitat’s ability to customise designs while maintaining high environmental standards

EcoHabitat is considering investing $600,000 in new construction technology to improve production processes. This technology is expected to reduce variable costs by 15% per unit while increasing efficiency. Management believes this investment will enhance EcoHabitat’s reputation as a leader in sustainable construction while supporting the company's long-term growth

The company’s current breakeven point is 17 units per year, but the new technology is expected to lower this to approximately 14.8 units per year. EcoHabitat’s objective is to produce 32 units annually, which would significantly exceed the breakeven output and improve profitability

EcoHabitat is also evaluating the broader impact of the investment. The technology aligns with its sustainability goals by reducing waste and energy use, which could attract eco-conscious customers. However, management is cautious about committing significant resources during uncertain economic conditions and potential implementation delays. By balancing financial metrics and qualitative benefits, EcoHabitat aims to make a decision that supports its strategic objectives

Table 1: Breakeven analysis (current and projected)

Metric

Current amount

Projected amount

Fixed costs (annual) ($)

350,000

350,000

Variable cost (per unit) ($)

20,600

17,510

Selling price (per unit) ($)

40,250

40,250

Contribution (per unit) ($)

19,650

22,740

Breakeven output (number of units)

17.81

14.84

Table 2: Investment impact summary

Factor

Details

Target market

Eco-conscious families, small developers, schools and offices

Location

Single location in Canada

Workforce

12 staff members, including one engineer, one designer and four production operatives

Potential cost savings

15% reduction in variable costs per unit

Sustainability benefits

Lower environmental impact due to efficient production processes

Risk factors

Economic uncertainty and potential delays in implementation

Production objective

32 units annually

Examine how reducing variable costs through new technology could improve EcoHabitat’s financial stability.

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