Edexcel A-Level Accounting: Break-even analysis (YAC11) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

The questions below test topic 2.7, Break-even analysis, from the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting (XAC11/YAC11) specification, Issue 2, September 2018: outcomes 2.7.1 to 2.7.3, Unit 2 (A2) only. Every firm named here is fictional, and all money values are in dollars. Round break-even units up and percentages to one decimal place.

Links: course hub, checklist, break-even study guide, free diagnostics.

Questions

1. Explain the term contribution and why it is used in break-even analysis. [2]

2. A furniture maker has the following costs. Classify each as fixed, variable, semi-variable or semi-fixed.

(a) Timber used in each table [1] (b) Annual rent of the workshop [1] (c) Electricity: a quarterly standing charge plus a rate per unit used [1] (d) Supervisors’ salaries, with one supervisor needed for every 15 joiners employed [1]

3. Quarnley Laundry’s monthly power cost is semi-variable. In March it washed 6,200 kg of linen and the power cost was 4,138. In July it washed 9,800 kg and the cost was 5,722.

Use the high-low method to calculate the variable cost per kg and the fixed element, then estimate the power cost for a month in which 8,000 kg are washed. [4]

4. Corrabeg Ltd sells juicers at 64 each. Variable cost is 39 per juicer and fixed costs are 57,500 a year. Budgeted sales are 3,000 juicers.

Calculate the contribution per juicer, the break-even point (units and revenue) and the margin of safety (units, percentage and revenue). [5]

5. Halsow Ltd expects to sell 6,000 units next year. Variable cost is 18.40 per unit and fixed costs are 49,200. The directors want a net profit of 30,000.

Calculate the selling price per unit needed. [3]

6. Strathy Ltd’s break-even chart shows fixed costs of 18,000, sales revenue of 72,000 at the budgeted 3,000 units, and a margin of safety of 1,200 units.

Calculate the selling price, the break-even point, the contribution per unit, the variable cost per unit and the budgeted net profit. [5]

7. Explain what the angle of incidence on a break-even chart shows, and what a narrow angle would tell a manager. [3]

8. Marrick Boat Tours earns a contribution of 18 per passenger. With one boat it can carry up to 600 passengers a month and its fixed costs are 8,100 a month. A second boat would raise capacity to 1,200 passengers and add 6,300 a month to fixed costs.

(a) Calculate the break-even point(s), in passengers, over the range 0 to 1,200 passengers. [3] (b) Calculate the monthly net profit at 600 passengers and at 1,000 passengers. [2] (c) Demand next month is forecast at 700 passengers. Advise the owner whether to run the second boat. [3]

9. Garvock Ltd sells a product at 85. Variable cost is 52 per unit, fixed costs are 99,000 and budgeted sales are 4,500 units. A supplier will raise variable cost to 60 per unit, and Garvock plans to raise its price to 90 with no change in budgeted sales.

(a) Calculate the current break-even point and margin of safety as a percentage. [2] (b) Calculate the new contribution per unit, break-even point and margin of safety as a percentage. [3] (c) Comment on the effect of the change on the business. [1]

10. Fennowe Ltd sells one product at 30. Variable cost is 18 per unit, fixed costs are 42,000, capacity is 6,000 units and budgeted sales are 5,000 units. A break-even chart is to be drawn up to capacity.

(a) State the two points you would plot for each of the fixed costs, total costs and sales revenue lines. [2] (b) State the break-even point that the chart would show, in units and dollars. [1] (c) Calculate the margin of safety in units and state how it is shown on the chart. [1] (d) Calculate the net profit at budgeted sales and state how it is shown on the chart. [1]

11. Inchmara Ltd makes garden water pumps and sells them at 77 each. Budgeted sales are 4,800 pumps a year and capacity is 6,000. Per pump, direct materials cost 21.00 and direct labour 14.60. Production overheads are semi-variable: 51,600 in a year when 3,000 pumps were made and 62,400 in a year when 5,000 pumps were made. Other fixed costs are 36,600 a year.

Automating assembly would cut direct labour by 6.00 per pump and add 12,000 a year to fixed costs.

(a) Use the high-low method to split the production overheads. [2] (b) Calculate the current variable cost per pump and total fixed costs. [2] (c) Calculate the current break-even point, budgeted net profit and margin of safety as a percentage. [3] (d) Calculate the break-even point and budgeted net profit if assembly is automated. [2] (e) Evaluate whether Inchmara Ltd should automate. [3]

Answers

1. Contribution is selling price less variable cost, per unit or in total [1]. Each unit’s contribution covers fixed costs first, then adds profit, so fixed costs ÷ contribution per unit gives break-even [1]. [2] Examiner insight: “Sales minus costs” is too vague to earn credit; name variable costs specifically.

2. (a) Variable [1] (b) Fixed [1] (c) Semi-variable [1] (d) Semi-fixed (stepped) [1] [4] Examiner insight: Stepped and semi-variable are easily swapped; a cost that jumps at a level of activity is semi-fixed.

3. Variable cost = (5,722 − 4,138) ÷ (9,800 − 6,200) = 1,584 ÷ 3,600 [1] = 0.44 per kg [1]. Fixed element = 5,722 − (9,800 × 0.44) = 5,722 − 4,312 = 1,410 [1]. At 8,000 kg: 1,410 + (8,000 × 0.44) = 1,410 + 3,520 = 4,930 [1]. [4] Examiner insight: Check the fixed element at the low level too (4,138 − 2,728 = 1,410) before building on it.

4. Contribution = 64 − 39 = 25 [1]. Break-even = 57,500 ÷ 25 = 2,300 juicers [1]; revenue 2,300 × 64 = 147,200 [1]. Margin of safety = 3,000 − 2,300 = 700 juicers [1]; 700 ÷ 3,000 = 23.3%, and 700 × 64 = 44,800 [1]. [5] Examiner insight: The percentage is of budgeted sales (3,000), not of break-even sales; dividing by 2,300 gives 30.4%, which is wrong.

5. Contribution needed = 49,200 + 30,000 = 79,200 [1]. Per unit = 79,200 ÷ 6,000 = 13.20 [1]. Price = 18.40 + 13.20 = 31.60 [1]. [3] Examiner insight: Setting out the contribution needed before dividing lets your method be seen even if the final figure slips.

6. Price = 72,000 ÷ 3,000 = 24 [1]. Break-even = 3,000 − 1,200 = 1,800 units [1]. Contribution = 18,000 ÷ 1,800 = 10 [1]. Variable cost = 24 − 10 = 14 [1]. Net profit = 1,200 × 10 = 12,000 [1]. [5] Examiner insight: Profit = margin of safety × contribution per unit, since fixed costs are covered at break-even.

7. It is the angle between the sales revenue line and the total costs line where they cross at break-even [1]. Its width reflects contribution per unit: a wide angle means profit rises quickly above break-even [1]. A narrow angle shows low contribution per unit, so profit grows slowly and is easily wiped out [1]. [3] Examiner insight: Link the angle to contribution per unit; describing it only as “the angle at break-even” gains little.

8. (a) One boat: 8,100 ÷ 18 = 450 passengers [1]. Two boats: (8,100 + 6,300) ÷ 18 = 14,400 ÷ 18 = 800 passengers [1]. Both lie inside their own bands, so there are two break-even points [1]. (b) At 600: (600 × 18) − 8,100 = 2,700 [1]. At 1,000: (1,000 × 18) − 14,400 = 3,600 [1]. (c) Two boats at 700 passengers: (700 × 18) − 14,400 = −1,800, a loss of 1,800 [1]. One boat carrying its full 600: profit 2,700 [1]. Run one boat: profit is 4,500 higher, though turning away 100 passengers may cost goodwill [1]. [8] Examiner insight: Test each break-even result against its band; one figure from total fixed costs misses the loss band from 601 to 799.

9. (a) Contribution 33; 99,000 ÷ 33 = 3,000 units [1]. Margin of safety 1,500 ÷ 4,500 = 33.3% [1]. (b) Contribution = 90 − 60 = 30 [1]. Break-even = 99,000 ÷ 30 = 3,300 units [1]. Margin of safety 1,200 ÷ 4,500 = 26.7% [1]. (c) The price rise does not fully cover the cost rise, so net profit falls from 49,500 to 36,000 and the business is closer to a loss [1]. [6] Examiner insight: Support the comment with a figure, such as the change in profit.

10. (a) Fixed costs: (0, 42,000) and (6,000, 42,000); total costs: (0, 42,000) and (6,000, 150,000) [1]. Sales revenue: (0, 0) and (6,000, 180,000) [1]. (b) Contribution 12; 42,000 ÷ 12 = 3,500 units and 105,000 [1]. (c) 5,000 − 3,500 = 1,500 units, shown as the horizontal distance from break-even output to budgeted output [1]. (d) (5,000 × 12) − 42,000 = 18,000, the vertical gap between sales revenue and total costs at 5,000 units [1]. [5] Examiner insight: Total costs at capacity include fixed costs: 6,000 × 18 = 108,000 alone is the variable cost, not the total.

11. (a) Variable rate = (62,400 − 51,600) ÷ 2,000 = 5.40 per pump; fixed element = 62,400 − 27,000 = 35,400 [1]. Check at 3,000: 51,600 − 16,200 = 35,400 [1]. (b) Variable cost = 21.00 + 14.60 + 5.40 = 41.00 [1]. Fixed costs = 35,400 + 36,600 = 72,000 [1]. (c) Contribution 36; break-even = 72,000 ÷ 36 = 2,000 pumps [1]. Net profit = (4,800 × 36) − 72,000 = 100,800 [1]. Margin of safety 2,800 ÷ 4,800 = 58.3% [1]. (d) Contribution = 77 − 35 = 42; fixed costs 84,000; break-even = 84,000 ÷ 42 = 2,000 pumps [1]. Net profit = (4,800 × 42) − 84,000 = 117,600 [1]. (e) Automation adds 16,800 profit at budgeted sales and break-even does not move, so it is better above 2,000 pumps [1]. But the angle of incidence widens: below 2,000 pumps losses are larger (21,000 against 18,000 at 1,500 pumps), and the extra 12,000 is committed whatever demand does [1]. With a 58.3% margin of safety, automate, provided the equipment is reliable [1]. [12] Examiner insight: Back the judgement with figures from earlier parts; pros and cons with no decision limit the credit.

Where marks are usually lost

• Adding the variable rate from the high-low method but forgetting the fixed element.
• Dividing fixed costs by selling price instead of contribution.
• Rounding break-even units down.
• Calculating margin of safety percentage on break-even sales.
• Ignoring a semi-fixed step, so a second break-even point is missed.
• Plotting total costs from the origin, or stopping lines at the budget instead of capacity.
• Giving an evaluation with no final recommendation.

Next steps

• Break-even revision notes
• Break-even study guide
• Edexcel A-Level Accounting hub
• Printable checklist
• Try all free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting (XAC11/YAC11) specification, Issue 2, September 2018 (first teaching September 2015), Pearson Education Limited. Unit 2: Corporate and Management Accounting, topic 2.7 Break-even analysis.