Question

1. Is the break-even volume, in units, a) the ratio of fixed cost per unit contribution margin or b) the ratio of selling price per unit contribution margin?

2. If the prevailing market interest rate increases, does the purchase price of an annuity decrease or increase? When calculating the future value of an annuity due, is the end date at the beginning or end of the last payment interval?

Answer 1

Answer :

(A) Break Even Point:

When someone asks a layman about his business he may reply that it is alright. But a technical man may reply that it is break even. So, Break Even means the volume of production or sales where there is no profit or loss. In other words, Break Even Point is the volume of production or sales where total costs are equal to revenue. It helps in finding out the relationship of costs and revenues to output. In understanding the breakeven point, cost, volume and profit are always used. The break even analysis is used to answer many questions of the management in day to day business.

Break Even in volumes is determined using formula as :

Break Even Point (in units) = Fixed Cost / Contribution per unit

Hence , statement (a) is correct. it is ratio of fixed cost per unit contribution margin.

(b) Higher interest rates will increase the amount of your lifetime payouts. But they may also change life expectancy tables in a way that works against you. ... When interest rates increase, fixed rate annuity yields increase just like CD yields. Fixed annuities typically offer a higher yield than comparable CDs , Hence , purchase price of an annuity increases with the increase in interest rate.

(c) An annuity due is a series of payments made at the beginning of each period in the series. Therefore, the formula for the future value of an annuity due refers to the value on a specific future date of a series of periodic payments, where each payment is made at the beginning of a period.