Break-even analysis is a technique widely used by production management and management accountants. Break-even analysis gives managers an idea of the minimum number of units it needs to sell in order for the product to be viable.

The break-even point for any firm is the level of production at which total cost and total revenue are equal so a firm makes zero profit, or 'breaks even'.

BEQ = VC x BEQ + FC

P P

Where:

BEQ = Break Even Quantity

VC = Variable Cost per unit

P = Price

FC = Fixed Cost

Geoff's Accounting Services does individual tax returns at a fixed price of $100. Geoff has only a small office for which he pays $750 a week in rent for or $150 per working day. Geoff owns six computers which are used to complete the tax returns. If Geoff hires 5 staff members to complete returns each of them are able to use a computer. If Geoff hires more than 5 staff members his staff have to wait to use a computer. If he hires less than 5 some of the computers are not used at all. We assume here that Geoff can sell any output of tax returns his company can produce.

Output '000	Price	Total Revenue	Fixed Cost	Variable Cost	Total Cost	Total Profit	Average Variable Cost	Average Total Cost	Marginal Cost	Marginal Revenue
0	100	0	150	0	150	-150	0	0.0	90	100
1	100	100	150	90	240	-140	90.0	240.0	80	100
2	100	200	150	170	320	-120	85.0	160.0		100
3	100	300	150		380	-80	76.7	126.7	20	100
4	100	400	150	250	400	0	62.5	100.0	10	100
5	100	500	150	260	410	90	52.0	82.0	50	100
6	100	600	150	310	460	140	51.7	76.7	100	100
7	100	700	150	410	560	140	58.6	80.0	190	100
8	100	800	150	600	750	50	75.0	93.8	200	100
9	100	900	150	800	950	-50	88.9	105.6	200	100
10	100	1000	150	1000	1150	-150	100.0	115.0

From the table above answer the following questions. Include your workings for each answer.

2. At an output level of two tax returns what is the marginal cost?
4. As price is fixed at $100 marginal revenue will always be $100. What type of market structure does this resemble?
6. What is the variable cost at output level 3?
8. Explain why average total cost starts out high and then begins to drop.
10. What occurs to average and marginal costs if Geoff hires more than 5 staff? What economic principle does this demonstrate? Explain.
12. Why are 3,000 returns not profitable?
14. Why are 9,000 returns not profitable?
16. What is the profit maximising output of Geoff's Accounting Services?
18. What is the formula used to determine this amount?
20. Profit can also be made at output level 8,000. Why is this not a suitable output level to choose?

Answer rating: 100% (QA)

1 To calculate the marginal cost at an output level of two tax returns we look at the change in total cost when increasing the output from 2 to 3 tax ... View the full answer