Break even analysis – Worksheet 30: Eat Healthy Food (EHF)

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Topics covered: BEP
  • Meaning
  • Advantages and disadvantages
  • Break even quantity and revenue
Sam runs a small restaurant called Eat Healthy Food ( EHF). He has borrowed funds from banks to purchase business property, machines and kitchen equipment. However, he has leased restaurant furniture ( tables and chairs).
Though there are many other restaurants, EHF is popular for its quality, price and customer service. EHF offers only lunch called EHF Mini.
EHF’s expenses details are as follows:
Lease cost $ 1 200 per month
Employees’ salary $ 2 200 per month
Interest payments $ 400 per month
Raw materials (ingredients) $ 6 per EHF Mini.
Price of each EHF Mini $ 10
Current output 1200 EHF Mini per month.
 

Questions:

  1. With reference to EHF, distinguish between fixed costs and variable costs [ 4 marks]
  2. Calculate contribution per EHF Mini sold [ 2 marks]
  3. Construct a break-even graph showing the break-even level of output, the margin of safety and the amount of profit at current output level. (Show any relevant workings)
  4. Identify and explain two advantages of using break even analysis as a planning tool for EHF [ 4 marks]
  5. Identify and explain two disadvantages of using break even analysis as a planning tool EHF [ 4 marks]

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