Part 2 – Case study Break-even analysis
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 |
3a. How are net tangible assets calculated? In your response refer to examples of both types of assets.
NTA = (Total assets of the company – intangible assests – Total liabilities), equipment’s including the company’s computers and the property like the building or furniture.
3b. Calculate the net tangible assets from the following example.
The company has total assets of $1 million, total liabilities of $100,000 and intangible goodwill of $100,000.
3c. Explain the importance of an accurate calculation of net tangible assets. Relate your answer to a company’s calculation of return on assets.
3d. Why might relying on the net tangible asset value be misleading across different industries? In your answer compare companies which have high levels of valuable intangible assets.
3e. Model-Net Tangible Assets (NTA) per Share Net tangible assets per share (NTA/share) is an extension of NTA that shows, in theory, the money that each shareholder would receive if the company were to liquidate.
From the information below determine whether Keynes Ltd is undervalued or overvalued.
3f. Outline how the composition of net tangible assets explains the capital structure decision?
4a. Distinguish between unsystematic and systematic risk. Identify which of these risks can be eliminated or significantly reduced.
4b. Explain the function of the Capital Asset Pricing Model (CAPM)
4c. What is the Capital Asset Pricing Model (CAPM) based on?
4d. Capital Asset Pricing Model (CAPM)
Expressed as the following equation:
Where: Er = Expected return of security i
Rf = Risk free interest rate
ErP = Expected return on Portfolio
b = Beta of the security
Calculate the expected return on Power Ltd shares when the expected return on Government bonds is 8%, the expected return on a portfolio of shares is 12% and the beta for Power Ltd is 0.9.
((12% – 8% ) * 0.9)+8% = 0.116
5a. Calculate the expected return for the following companies:
Beta Co-efficient
Crippsey Pty Ltd 1.1
Docherty Pty Ltd 0.8
The expected return on Government bonds is 10% and the expected return on the market portfolio is 18%.
(1.9* (18% – 10%)) + 10% = 0.252
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