Break Even Analysis

One of the roles of financial management is to assist businesses to choose low-risk investments while ensuring higher returns. This idea is held as a way to maintain and maximise the shareholders wealth or bondholders profits. The following is an extract of information from two companies: Cynored Pty Ltd and CB Electricity Pty Ltd respectively.

Cynored Pty Ltd CB Electricity Pty Ltd

Electricity Units Produced and Sold 25,000 25,000

Amounts $ Amounts $

Revenues 112 500 000 112 500 000

Total Cost 75 000 000 75 000 000

Variable Cost 25 000 000 50 000 000

Fixed Cost 50 000 000 25 000 000

Net operating Income 37 500 000 37 500 000

Required:

1. You are required to find the break-even point for each company in Units
2. Calculate the degree of operating leverage for each company at 25,000 units
3. Comment on the differences that you observe between these companies break-even points and degree of operating leverage
4. Based on the information on this question, how can the management of Cynored Pty Ltd and CB Electricity Pty Ltd use marginal costing in improving the fortunes of their companies?