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PROBLEM SET CHAPTER 3

BUSINESS DIMENSION
EXERCISE 1
The airline Eagle Express does the route New York-London and New York-Brussels. The
company BWA is interested in doing the same route New York-Brussels-London, for this reason
is it is thinking in buying the company Eagle Express if an economic study about the profitability
of this route advice it.
They have the following data available:

 The route has capacity for 1,000 passengers a month.


 The price of the passage is of 0.24 €/person
 The fixed costs are of 1.260 €
 The contribution margin is of 75% of the price

a) Which should be the average number of passengers to cover costs? BP(q)=7,000


passengers/month
b) If the Company is willing to keep a benefit of a 12% of the income, which should be the
average number of passengers? BP(q) = 9,000 passengers/month

EXERCISE 2
The Company MACARRONCHELLI, S.A., is dedicated to manufacture and sell only one
product, from which we know the following data from last year:
Contribution margin: 2.40 €
Degree Operating Leverage (DOL): 2.66
Profit: 36,000 €
Coverage coefficient (CC): 0.20

a) Determine the total costs for the whole year. CT = 442,800€


b) Calculate the break-even point (in physical units (quantity)) BP(q)=24,900 units
EXERCISE 3
Two companies A and B use different technological procedures, but they have the same average
production volume of 100,000 units. The costs of that production volume are the following:

Company A Company B
Fixed costs 2,400 € 1,200 €
Total costs 3,600 € 3,600 €

a) Calculate the break-even points for each company if the price is of 0.06€ per unit of product.
Company A: BP(q)= 50,000units
Company B: BP(q)= 33,333 units
b) Draw graphically both break-even points in the same graph.
EXERCISE 4

Two companies working on the same activity present the following costs structure:

Company 1 Company 2
Fixed costs 1,200 € 3,600 €
Unitary Variable costs 0.09 € 0.06 €
Price 0.12 € 0.12 €.

Without varying the costs neither the price, the production and sale of both companies
was of 100,000 physical units in the year “n” and 120,000 physical units in the year “n+”1.

a) Determine DOL of each company.


Company 1: DOL= 1.66
Company 2: DOL= 2.5
b) Find the break-even point for each company in monetary units.
Company 1: BP(q)= 40,000units or 4,800€
Company 2: BP(q)= 60,000 units or 7,200€
c) Which of the two companies would be better situated supposing that the market can
only absorb 95,000 physical units?
Company A: B= 1,650€

Company B: B= 2,100€

EXERCISE 5
A company worked, during the past year, with a DOL equal to 6 and obtained a profit of 240,000€,
producing and selling 600.000 units of product.
Knowing that his coverage coefficient was equal to 0.4, which is the break-even point?
BP(q)=500,000 units

EXERCISE 6
A company has a DOL equal to 2.25. This company has increased his profit in 1.08 million€, as
a consequence of an increase of 20% of his production.
Knowing that before the increase in productivity they were selling 150.000 units, that the price
was of 48 €, and that fixed costs were of 3 million €, determine the unitary variable cost (CVA).
CVu = 12€

EXERCISE 7
A tourism company had a total income of 19,500,000 €. During the past economic exercise, the
variable costs per day were of 3.000 €, and the DOL for that volume of business was of 2.40.
Supposing that the economic exercise was of 360 days, determine:
a) Fixed costs. CF=10,745,000€
b) In which date reached the break-even point? Knowing that it developed his activity in an
uniform way (with the same degree of occupation during all the days of the year).
In 210 days.

EXERCISE 8
Two pharmacies, situated in the same street, billed last year 1,400,000€, each one, selling exactly
the same medicines at the price established by the respective manufacturers.
The profits of a pharmacy rise to 216,000 €, and the DOL is of 1.62. The other pharmacy, has
fixed costs of 350.000€ more than the other because it has done some reforms, and his DOL is
the double.
Determine the variable costs, the coverage coefficient and the break-even point in €, for both
pharmacies.

PHARMACY A:
CVA = 1.050.080 €.
CC = 0,25
BP = 535.680 €

PHARMACY B:
CVB= 893.750 €
CC= 0,36
BP= 972.222,22 €

EXERCISE 9

A chairs manufacturer company bears fixed costs equal to 3.000€ each month, and variable costs
equal to 40% of his sales. Each chair is sold at a unitary price of 30 €

To face competition, the company decides to study the possibility to buy new machinery which
would suppose an increase of the fixed costs in 900€ monthly and a decrease of 10% of the
variable costs.
Which would be the desired annual volume of sales if they buy the machinery?
750 units/month

EXERCISE 10
The company Z has an annual production volume of 96,000 physical units, which corresponds to
a degree of occupation of his installations of 80%, what brings him some inactivity costs of
72,000€. Knowing that the price is of 12€, what allows him work with a coverage coefficient of
0.40 and that the company is trying to achieve a profit of 150,000 €. Would it be enough to achieve
it if they produce 96.000 units?
It is not enough

EXERCISE 11
From 1st January of the year “n” a company of writing material called BEEK is exclusively devoted
to manufacture and sell his pen BP (Beek Pen), for which has fixed a price of 0.36 €./Unit. When
the pen BP goes out of factory, it has the following components:
40 gr of plastic
1 gr of steel
2 cm3 of ink
(Reminder: 1 litre = 1.000 cm 3)
The company has some agreements with suppliers that allow it to obtain:
- The plastic at 3.60 €/Kg.
- The steel at 12 €/Kg.
- The ink at 24 €/l.
Other costs that bear the company BEEK are the following:
240,000 €./Year (Buildings amortization)
60,000 €/Year ( Machinery“)
48,000€/Year ( Staff)
42,000 €/Year (Maintenance and cleaning, another company hired)
The factory, highly automated, works all the days of the year (even festive) giving a daily
production of 15,338 units. The production is only interrupted during the 31 days of August
(holidays).
In which date will reach the company his BP?

In 158,9  159 days  June 9th

EXERCISE 12
A sofa manufacturer is evaluating his business, and for this has the following data:
 The profit that expects for this year is of 487,000€, the same that the previous year
 The DOL is equal to 1.60 for the level of sales that originates that profit.
 The fixed costs rise to 150,000€ and the Unitary Variable Cost is equal to 180 €.
 Each month produces 90 sofas.
a) Which day of the year will reach the break-even point? (Consider the months of 30 days each
one) BP (days)= 69,30 days  70 days
b) How it has to modify the rhythm of production if it wants to ensure a profit of 270,000 € the
1st October? They have to produce 2.15 units/day

EXERCISE 13
Two companies (A and B) use different technologies to elaborate the same product at a price of
12 €
Supposing that for a volume of production of 50,000 units, both companies have the same unitary
cost; calculate the break-even point for each one of them, taking into account the following data:
The total costs, for the indicated volume of production, rise to 540,000 € for each one of them,
whereas the DOL is equal to 4 for the company A and for the company B is 2.

Company A: BP(q)=37,500 units


Company B: BP(q)=25,000 units

EXERCISE 14
The Treasury Ministry of the Bagi Republic wants to increase in efficiency when collecting his
tributes, for this reason has begun to inspect the company Bana-Na. From this company knows,
thanks to his best inspection agents, that the level of operating leverage of the previous year was
equal to 1.625 and that the profit obtained in the exercise of the previous year was of 2.88 million
"Ghuhs" (national coin of the republic), 6% less than the declared this year.
Knowing that the volume of production (totally sold) of the previous year reached the 200,000
units -increasing the production in 12.000 units this year-, that the unitary price is of 42 "Ghuhs"
and that the fixed costs are of 1.80 million "Ghuhs":

a) Determine if the Profit that the company Bana-Na has obtained coincides with the declared
for this year. There is a difference of 0.11
b) The Variable Unitary Cost of that company, as well as his Contribution Margin.
CVu= 18.60€
Contribution Margin=23.40€

EXERCISE 15
A company has registered, during one year, the following data:
Fixed costs: 240,000 €
Variable costs: 240,000 €
Total income by sales: 300,000 €
Indicate the amount of the income by sales that would correspond to the break-even point.
I=1,200,000€

EXERCISE 16
At 30th June, a company had produced and sold 140,000 units of product, his total costs rose to
408,000 € and his income were inferior to the total costs by 72,000€.
At the end of year, the company had produced and sold 240,000 units of product, the total costs
had risen to 529,000€, obtaining a profit of 48.000€
Determine the break-even point of the company.

BP(q)= 200,000 units

EXERCISE 17
East Hotels, foresees that in this exercise will register the following data about his production:
It will incur in variable costs of 2,400 €/day. His productive activity will be the same during all the
year.
The fixed costs foreseen by the company are of 400,000 €.
It projects to reach his critical point or BP the 30th November.
To what extend will the daily income forecast rise? What will be the result reach at the end of
the annual exercise?
NOTE: Consider the year equal to 360 days and the months equal to 30 days.

Daily Income= 3,612.12€


Result end of the year= 36,363.20€

EXERCISE 18
Pablo Ernesto, a designer still unknown, is proprietary of a designing company. During last year,
it reached a total income of 4,800,000 €. Knowing that his coverage coefficient was equal to 0.50
and his fixed costs rose to 30% of his turnover determine the total variable costs for the last year
and his BP, expressed in monetary units.

CV=2,400,000€
BP (€)=2,880,000€