Question [2] Q.2 A manufacturer produces 1.5t Electric powered Mini Excavators for the construction industry at a selling price of 40,000 each, of which 21,000 is a variable cost. The manufacturer's maximum output is 100 units a year. Overheads amount to 650,000 for a year. At the present time 65 units are made and sold each year. (a) Determine the number of units at break-even point and the present annual profitability (7 marks) The manufacturer believes that by improving the machine and reducing the selling price to 38,000 the number sold can raised to 95 units a year. This well require spending 15,000pa on marketing. It will also require a more expensive battery, which along with other modifications, will increase the variable cost by 1,000 per machine. (b) Calculate the new break-even point and the financial outcome (profit or loss) of the new policy. (7 marks) (c) Explain what is meant by the concept of "margin of safety" and its use in financial decision-making (7 marks) (d) Discuss, with examples, the problem areas that are commonly encountered when applying break-even analysis in actual practice. (12.33 marks) Total [33.33] marks 5% Present Value Table Present value of 1 in *w* years at discount rate, r. Discount rate (1) Years (n) 1% 2% 4% 6% 8% 9% 10% 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 4 0.961 0.924 0.888 0.855 0.823 0792 0.763 0.735 0.708 0.683 5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 1 N 3 4 5 6 6 7 8 7 0.942 0.933 0.923 0.914 0.905 0.888 0.871 0.853 0.837 0.820 0.837 0.790 0.746 0.813 0.760 0.711 0.789 0.731 0.677 0.766 0.703 0.645 0.744 0.676 0.614 0.705 0.666 0.630 0.596 0.564 0.665 0.623 0.583 0.547 0.513 0.627 0.582 0.540 0.502 0.467 0.592 0.544 0.500 0.460 0.424 0.558 0.508 0.463 0.422 0.386 8 9 10 10 11 11 12 0.896 0.887 0.879 0.870 0.861 13 0.804 0.788 0.773 0.758 0.743 0.722 0.701 0.681 0.661 0.642 0.650 0.625 0.601 0.577 0.555 0.585 0.527 0.475 0.429 0.388 0.350 0.557 0.497 0.444 0.397 0.356 0.319 0.530 0.469 0.415 0.368 0.326 0.290 0.505 0.442 0.388 0.340 0.299 0.263 0.481 0.417 0.362 0.315 0.275 0.239 12 13 14 14 15 15 Years (n) 1 2 3 1 2. 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 UN 4 0.507 6 7 0.535 482 0.434 0.391 0.352 7 B 9 10 0.480 0.425 0.376 0.333 0.295 0.452 0.404 0.361 0.322 0.456 0.400 0.351 0.308 0.270 8 0.432 0.410 0.390 0.370 0.352 0.335 0.376 0.354 0.333 0.314 0.296 0.279 0.327 0.305 0.285 0.266 0.249 0.233 0.284 0.263 0.243 0.225 0.209 0.194 0.247 0.227 0.208 0.191 0.176 0.162 9 10 11 12 13 11 12 0.317 0.286 0.258 0.232 0.209 0.287 0.257 0.229 0.205 0.183 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065 13 14 14 15 15 Annuity Table Present value of 1 receivable at the end of each year for "w" years at discount rate,r. Discount rate() Years (n) 1% 2% 3% 5% 6% 7% 8% 9% 10% 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 5 4.853 4.713 4.580 4,452 4.329 4212 4.100 3.993 3.890 3.791 1 2 3 4 6 7 6 7 8 9 10 5.795 5.601 5.417 5.242 5.076 6.728 6.472 6.230 6.002 5.786 7.652 7.325 7.020 6.733 6.463 8.566 8.162 7.786 7.435 7.108 9.471 8.983 8.530 8.111 7.722 4.917 5.582 6.210 6.802 7.360 4.767 5.389 5.971 6.515 7.024 4.623 5.206 5.747 6.247 6.710 4.486 4.355 5.033 4.868 5.535 5.335 5.995 5.759 6.418 6.145 8 9 10 11 11 12 10.37 9.787 9.253 11.26 10.58 9.954 12.13 11.35 10.63 13.00 12.11 11.30 13.87 12.85 11.94 13 8.760 8.306 9.385 8.863 9.986 9.394 10.56 9.899 11.12 10.38 7.887 8.384 8.853 9.295 9.712 7.499 7.943 8.358 8.745 9.108 7.139 6.805 6.495 7.536 7.161 6.814 7.904 7.487 7.103 8.244 7.786 7.367 8.559 8.061 7.606 12 13 14 15 15 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% Years (n) 1 2 3 1 2 0.901 0.893 0.885 0.877 0.870 1.713 1.690 1.668 1.647 1.626 2.444 2.402 2.361 2.322 2.283 3.102 3.037 2.974 2.914 2.855 3.696 3.605 3.517 3.433 3.352 0.862 1.605 2.246 2.798 3.274 0.855 1.585 2.210 2.743 3.199 0.847 1.566 2.174 2.690 3.127 0.840 1.547 2.140 2.639 3.058 0.833 1.528 2.106 2.589 2.991 4 5 5 6 7 8 9 10 4.231 4.111 3.998 3.889 3.784 4.712 4.564 4.423 4.288 4.160 5.146 4.968 4.799 4.639 4.487 5.537 5.328 5.132 4.946 4.772 5.889 5.650 5.426 5.216 5.019 3.685 4.039 4.344 4.607 4.833 3.589 3.922 4.207 4.451 4.659 3.498 3.410 3.326 3.812 3.706 3.605 4.078 3.954 3.837 4.303 4.163 4.031 4.494 4.339 4.192 10 11 12 13 14 15 6.207 5.938 5.687 5.453 5.234 6.492 6.194 5.918 5.660 5.421 6.750 6.424 6.122 5.842 5.583 6.982 6.628 6.302 6.002 5.724 7.191 6.811 6.462 6.142 5.847 5.029 5.197 5.342 5.468 5.575 4.836 4.988 5.118 5.229 5.324 4.656 4.793 4.910 5.008 5.092 4.486 4.611 4.715 4.802 4.876 4.327 4.439 4.533 4.611 4.675 11 12 13 14 15