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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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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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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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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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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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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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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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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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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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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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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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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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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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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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).
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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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