Question

Q-Constructions has tasked you to investigate the number of construction projects per year for which the company would need to break-even and make a profit of $500,000 per year. The average price of a building contract is $700,000 per project. The following are the fixed and variable costs of Q-Constructions in Table 2:

Description	Cost
Office Space	55,000
Professional Staff Salaries	205,000
Insurances	50,000
Machine Maintenance	80,000
Website Management	30,000
On-site workers’ salaries	$120,000 per project
Average Material Cost	60% of the project price per project

Table 2: Associated Costs of Q-Constructions

Use this information above to complete the requested analyses below.

1. (5 marks) Calculate:
   1. The break-even number of projects needed by the company.
   2. The income made by the company at break-even.

Show all working out including the modelling and solution steps.

2. (3 marks) Q-Constructions is interested in making a profit per year to ensure the company has a positive financial outlook and new ventures can be done in the future. Calculate how many projects per year need to be completed to make a profit of $500,000 per year.
3. (6 marks) Q-Constructions workers’ have approached the building union and been informed they could be paid a higher salary and want their salaries to be determined based on a percentage of the project price. The company has reviewed their historical records on the number of projects per year and has made the decision to respect the workers’ demands and notice that the company would maintain a positive financial outlook if they set their break-even target at 4 projects per year. Determine the new salary percentage for the onsite workers’ on a project price based on the company’s average project price and associated costs in Table 2.

4. (3 marks) Based on the new on-site workers’ cost per project from part (c), calculate the new number of projects that need to be completed to maintain a profit of $500,000 per year.
5. (3 marks) Due to the change in the on-site workers’ salaries, what is the effect on contribution margin in relation to the variable cost? Explain the effect of this change on the break-even number in part (a).  

Hint! Your discussion should focus on the impact made by the contribution margin. You can show the calculation of the contribution margin to support your discussion, but no other calculations should be used.

6. (4 marks) In Excel, produce a break-even graph for Q-Constructions and include it here – you will also include a copy in the infographic where requested.

There will be 3 lines on the Q-Constructions Break-Even graph: one for total revenue for Q-Constructions and two representing the original total cost and the new total cost for Q- Constructions.

On the graph, identify the general regions corresponding to profits and losses. The units along the x-axis will be the number of projects. The units along the y-axis gives the revenue in dollars.

Want a video how-to on producing a break-even graph? We demonstrated this with a detailed explanation in the Week 3 lecture – check out the second hour of your class’ recording. The instructions below tell you what to name each column and other important details so keep reading!

Excel Instructions:

1. Create a column called Number of Projects and enter values from 0 to 20 in single unit increments for Q-Constructions analysis. This column plays the role of ‘x’ in break-even calculations.

2. Create four more columns: Total Original Cost, Total New Cost, Total Revenue, Total Profit and add your initials to these column names. In each of these columns, enter appropriate formulae in EXCEL to obtain the total cost and total revenue corresponding to each value in the Number of Projects column.

3. Highlight all the columns and go to Insert  Charts Scatter to obtain a graph. Label the graph appropriately (i.e. title, axis labels, legend) and ensure the chart title includes your network ID (the part of your email address before @ e.g. [email protected] has the network ID jbloggs).

TOTAL 24 MARKS

Answer 1

1	FIXED COSTS TO Q COSTRUCTIONS
	Office Space	55,000
	Professional Staff Salaries	2,05,000
	Insurances	50,000
	Machine Maintenance	80,000
	Website Management	30,000
	TOTAL FIXED COSTS TO Q COSTRUCTIONS	4,20,000
2	Variable Costs to the Q constructions
	On-site workers’ salaries	$120,000 per project
	Average Material Cost	60% of the project price per project
3	Revenue Elelment	$
	The average price of a building contract	7,00,000
	Less : Variable costs
	On-site workers’ salaries	-1,20,000
	Average Material Cost	-4,20,000
	Total Variable costs per project	-5,40,000
	contribution from each project =	1,60,000
	The average price of a building contract - Fixed costs
4	The break-even number of projects needed by the company.
	Break-Even point = Fixed Costs to Q-Constructions ÷ Contribution Margin to Q-Constructions per project.
		!=420000/160000
	Answer to a(i)	3
	The break-even number of projects needed by the company is 3 projects
5	The income made by the company at break-even
	Gross income (Gross Receipts at brak even)
	!=Average project cost * break even no of projects	2100000
	Net income at brak even	Zero
	at break even point no profit and loss tonQ Construction
6	projects per year need to be completed to make a profit of $500,000 per year.
	Break-Even point with desired profit formula =
	(Fixed Costs to Q-Constructions + Desired Profit Per year) ÷ Contribution Margin to Q-Constructions per project.
	TOTAL FIXED COSTS TO Q COSTRUCTIONS	420000
	Desired Profit Per year	500000
	Total Contribution required to earn a desired profit	920000
	projects per year need to be completed to make a profit of $500,000 per year.	!920000/160000
		6
	projects per year need to be completed to make a profit of $500,000 per year is six projects