a) TFC = $1,840 (Rent, Salaries, Admin + Power)
(b) BEQ = $1,840 / $16 = 115 child places
(c) Graph: Title; Axis labels; TR line; TC line and TFC line accurately drawn and labeled
(d) Graph: Breakeven point shown and Breakeven level of output shown
(e) Demand = 20 children per day * 22 days = 440
Safety margin = 440 - 115 = 325 child places (or a very safe 282%)
The safety margin must be clearly shown on the graph for maximum marks
(f) Strengths (application needed):
• It is easy to understand and quick to construct, especially for one product businesses such as Lisa Chan's Day-Care Centre.
• As a management decision making device, it can be used to study the impact of changes in the selling price, fixed costs or/and variable costs.
• It can be useful when a business desires to seek external finance, perhaps for expansion reasons, especially if it has a high MOS.
Weaknesses (application needed):
• Fixed costs do not necessarily remain steady, e.g. salaries and rent may increase
• Average variable costs are improbable to be constant due to economies of scale
• Prices are likely to be lowered (i.e. not remain constant) to attract greater demand
• Break-even analysis is a static model so the results are of limited use
• Revenue and Cost figures are based on estimates which may not prove to be accurate