Question on Break-even Analysis


XYZ Company manufactures a product called “PERMA”. Pertinent cost and revenue data relating to the manufacture of this product is given below:

Selling price per unit 66  
Variable production cost per unit 44  
Variable selling cost per unit 4  
Fixed production cost (total)   Shs.200,000
Fixed selling and administrative cost (total)   Shs.99,000


  1. Calculate the break-even sales level in shillings;
  2. Suppose the company desires to make a profit of shs.195,000, what should be the output in units?
  3. A new machine, which is more efficient, is installed. This machine increases the fixed production cost by 20% but reduces the variable production cost per unit by 30%. What is the new break-even point in sales revenue?
  4. State five limitations of break-even analysis. (Total: 20 marks)


Explain 10 limitations of Break-even analysis. (Total: 20 marks)


  1. Explain the following terms as used in CVP analysis.

Break-even charts

  • Variable cost ratio
  • Contribution margin ratio
  • Margin of safety
  • Profit volume ratio
  • Marginal Income Ratio            (12 marks)
  1. A company has the following costs;
Employee’s salaries 17,000
Rent insurance 11,000
Depreciation on equipment 2,000
Variable costs 6,.000

All other costs except those indicated as variable are fixed. The selling price per unit of output is Shs.10. The above variable costs relates to 6,000 units output.


  1. Calculate the Break-even point (4 marks)
  2. Calculate the cash flow break-even point (4 marks)     (Total: 20 marks)


  1. Explain the term depreciation tax shield and its important in break-even analysis. (5 marks)
  2. Repeat Question 4 b(ii) above, but assume that tax rate is 48%. (10 marks)
  3. From your results, what do you observe? (5 marks)       (Total: 20 marks)

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