Question

4. Break-even analysis To be profitable, a firm has recover its costs. These costs include both its fixed and its variable costs. One way that a firm evaluates at what stage it would recover the invested costs is to calculate how many units or how much in dollar sales is necessary for the firm to earn a profit. Consider the case of Petrox Oil Co.: Petrox Oil Co. is considering a project that will have fixed costs of $15,000,000. The product will be sold for $41.50 per unit, and will incur a variable cost of $11.25 per unit. Given Petrox’s cost structure, it will have to sell units to break even on this project (Q BE ). Petrox Oil Co.’s marketing sales director doesn’t think that the market for the firm’s goods is big enough to sell enough units to make the company’s target operating profit of $25,000,000. In fact, she believes that the firm will be able to sell only about 150,000 units. However, she also thinks the demand for Petrox Oil Co.’s product is relatively inelastic, so the firm can increase the sale price. Assuming that the firm can sell 150,000 units, what price must it set to meet the CFO’s EBIT goal of $25,000,000? $291.82 $277.92 $319.61 $347.40 What affects the firm’s operating break-even point? Several factors affect a firm’s operating break-even point. Based on the scenarios described in the following table, indicate whether these factors would increase, decrease, or leave unchanged a firm’s break-even quantity—assuming that only the listed factor changes and all other relevant factors remain constant. Increase Decrease No Change The firm’s fixed costs increase. The variable cost per unit decreases. The amount of debt increases, causing the firm’s total interest expense to increase. When fixed costs are high, a small decline in sales can lead to a decline in return on equity (ROE).

Answer 1

	Fixed Cost	15000000
	Selling Price	41.5
	Variable Cost	11.25
	Contribution	30.25
	BEP	Fixed Cost/ contribution
		495867.8	units	These units are necessary for a firm
				to earn profit
	Quantity	150000	150000	150000	150000
	S.P = Sales/qty	277.9167	305.79667	296.53	342.85
	Sales (balancing figure)	41687500	45869500	44479500	51427500
less	Variable cost	1687500	1687500	1687500	1687500
	Contribution	40000000	44182000	42792000	49740000
less	Fixed Cost	15000000	15000000	15000000	15000000
	EBIT	25000000	29182000	27792000	34740000
	Fixed Cost	15000000	15000000	15000000	15000000
	Contribution	40000000	44182000	42792000	49740000
	Contribution per unit	266.6667	294.54667	285.28	331.6
	BEP	Fixed Cost/ contribution per unit
		56250	50925.716	52579.921	45235.2232
	When the selling price of the product increases , the BEP falls .
	While the other factors like fixed cost, variable cost per unit remain same.