Break-even analysis - changes in variables - case study
In this case study the key facts have been extracted from text, so that the information concentrates on the break-even aspects. In an examination case study this data may be spread over different paragraphs and appendices. You have to learn to read material and extract the key data for the appropriate question.
KL Steam Engines plc.
KL Steam Engines makes a single narrow gauge steam engine in a factory in South East Asia These engines are sold to leisure centres and theme parks across Asia. It could make 80 units per year, and its cost structure is as follows;
- Fixed costs: $2.4 million
- Variable costs: $90 000 per engine
The product sells for $150 000 each, and they produce and sell 6 units per month at the moment.
Draw a break-even chart for the company. Fully label the chart. From the chart calculate the break-even quantity, revenue and margin of safety.
The financial manager of KL produces a financial forecast for the coming trading year and identifies increases in energy costs and rent as threats to the business. The effect of these will be:
- Fixed costs increase to $2.8 million
- Variable costs increase to $100 000 per engine
Show these changes on the break-even chart and calculate the effect of these costs increases on the KL's break-even quantity, revenue, margin of safety and profit. Fully label your diagram.
The finance manager proposes an increase in price to $170 000 to cover the predicted increase in costs.
Calculate the output required for KL Steam Engines to make its target profit of $2.8 million at the new price and cost levels. Comment on your results.