(a) What is the difference between the (ordinary) break-even point and the cash

Question

(a) What is the difference between the (ordinary) break-even point and the cash break-even point and which will be the greater?     (8 marks)

(b) Pharmaceutical Bhd manufactures medical products which are sold to pharmacies and clinics. The average selling price of its finished product is $ 180 per unit. The variable cost for these same units is $ 110. Pharmaceutical Bhd incurs fixed costs of $ 630,000 per year. Required to answer the followings:

i) What is the break-even point in units for the company?                (2 marks)

ii) What is the Ringgit Malaysia sales volume the firm must achieve to reach the break-even point?       (3 marks)

iii) What would be the firm’s profit or loss at the following units of production sold: 12,000 units? 15,000 units? & 20,000 units?         (4 marks)

iv) Find the degree of operating leverage for the production and sales levels given in part (iii) above.     (3 marks)

Explanation / Answer

Ans (a)

(b) 1

b (iii)

b (iiii)

Ordinary Break even Point It is the no of units in sales or sales amount where the entity makes no profit or loss. It is the level of activity where the entity is able to cover all its fixed cost from its contribution i.e. Sales-VC Cash Break even point The mere fact that an entity is running on loss is not indicative of the entity is able to achieve cash break even. Cash break even indicates that the entity will be able to pay its normal expenses when its due though running on loss. It is calculated as the fixed cost -non cash expenses like amortization and depreciation /Contribution. Ordinary break even point will be greater to achieve.

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