Solution to FRIENDS BREAK EVEN ANALYSIS CASE STUDY

Q.1 a. Break Even Point for Charms Break Even Point = Fixed Cost Contr. Margin B.E.P = 500+3000 60 - 5 64 tickets Break Even Point for Flames Break Even Point = Fixed Cost Contr. Margin B.E.P= 500+6000 60 - 5 119 tickets

B.E.P =

B.E.P=

b.

B.E.P % =

64 x 100 200 32%

B.E.P % = 119 X 100 200 B.E.P % = 59.50%

B.E.P % =

Q.2. a. Tickets 150 200 250 300 b. Tickets 150 200 250 300 Q.3 119 - 64 = 55 tickets Q.4 Unit Sales = Costs + Target Profit Fixed C.M per unit Total Revenue 9,000 12,000 15,000 18,000 Total V.C 750 1000 1250 1500 Total F.C 6500 6500 6500 6500 Profit 1,750 4,500 7,250 10,000 Total Revenue 9,000 12,000 15,000 18,000 Total V.C 750 1000 1250 1500 Total F.C 3500 3500 3500 3500 Profit 4,750 7,500 10,250 13,000

Charms Unit Sales = Unit Sales = 3500 + 8000 55 209 tickets

Flames Unit sales = Unit sales =

6500 + 8000 55 264 tickets

Q.5 Finding the profit levels at maximum and minimum limits Profit = [Unit Sales (Q) x C.M] - F.C Lower limit = 150 tickets P = 50 Q = 150 Charms Flames $4,750 $1,750 Upper limit = 200 tickets P = 50 Q = 200 Charms Flames $7,500 $4,500 P = 40 Q = 220 $6,400 $3,400 P = 40 Q = 240 $7,300 $4,300 P = 40 Q = 170 $4,150 $1,150 P = 40 Q = 190 $5,050 $2,050

Q.6 Selecting Charms is more profitable solution since the Friends concern is to get by this year and then concentrate on future dances. If price level is reduced to $40, Charms yeild profit of $7300 while Flames result in disappointing $4300. Although it is probable that 200 tickets can be sold even in case of Chars as well, however in case of not meeting with the goal of selling 200 tickets, the higher overhead costs of selecting Flames will result in losses which not acceptable for the organization. Break Even point percentage in case of Charms is 32% while in case of Flames it is 59.5%. Organizations prefer lower B.E point to gain increased profits. As found in question 5, Friends is unable to generate $8000 even under best case scenario with 240 tickets sold, in this situation, it is better to pick Charms yielding higher profit to stand on its own this year. Moreover even in worse case scenario with 150 tickets sold, Charms gives 2.5 times the profit i.e. $4750 vs 1750. Choosing Flames will give the organization qualitative benefits over Charms.

Q.8

Profit for Charms = 270 x 60 - (1350 + 3500) Profit = $11,350 Profit for Flames = 270 x 60 - (1350 + 6500) Profit = $8,350 Charms gives immediate profit to the company which is why it is preferrable.

Q.9 The demand curve suggests about the band that has more demand as compared to the other. If opportunity costs, demand curves are same, profits are the same. If both are equally famous we cannot choose one among the two options.

yeild profit at 200 tickets

d to the other. equally famous