Practice questions

Break Even Analysis-1

• The price of a product is Rs. 100. The variable cost for manufacturing
and marketing the product is Rs. 80. If the fixed cost involved is Rs. 10
lakh find the break even volume (BEV) in terms of units. What is break
even sales revenue?
• Solution:
100*BEV = 10,00,000 + 80*BEV
hence (100-80)*BEV = 10,00,000
BEV = 10,00,000/20 = 50,000 units.
BEV Sales Revenue = Price* BEV units = 100*50000 = Rs. 50 lakh.
Break Even Sales -II
• The variable cost for manufacturing and marketing the product is Rs.
80. If the fixed cost involved is Rs. 10 lakh and the production of the
factory is limited to 40000 units, find the minimum price at which the
unit can break even?
• Solution:
Let us say the price = p
The minimum price for break even would happen at the maximum volume of
production here which is equal to 40000 units.
P*40000 = 10,00,000+80*40000 = 42,00,000
P = 4200000/40000 = Rs. 105.
Break Even Sales-III
• A company is planning to launch a gadget in the market. The company is
sourcing the gadget from the china at Rs. 1000 per piece and does not
incur any other variable cost. The only fixed cost components involved
for the company are the costs of sales force which is Rs. 2 crore (Rs. 20
million) per month and the cost of advertising. The company has
planned an ad campaign costing Rs. 1 crore for the month. Find the
Break even sales units if the company proposes a price of Rs. 1500 per
piece for the gadget.
• Solution
1500*BEP = 300,00,000+1000*BEP
BEP = 300,00,000/(1500-1000) = 60,000 units.
Break Even Sale-III
(contd..)
• The market research department of the company estimates the overall market size
to be equal to 10,00,000 units and believes, given the tough competition
prevailing in the market they would not be able to get more than 5% market share.
Assuming that the sales team cannot be downsized and their cost would not
changed, by what amount should the company reduce its ad budget in order to
break even.
• Solution:
Let us say the new total fixed cost = F
5% market share = 5%*10,00,000 = 50,000 units
50000*1500 = 50000*1000 + F
F = 50000*1500 – 50000*1000 = 50000*500 = 2,50,00,000 (Rs, 2.5 crore)
As the expenditure on sales team = Rs. 2.0 crore
Revised ad budget = 2,5 crore – 2.0 crore = Rs. 50 lakh
Break Even sales – IV Multiple
models
• Let us say the firm in the previous question was sourcing 2 gadgets in place
of 1. The variables costs of Model1 and Model2 are Rs. 1000 and Rs. 1500
respectively. They account for 60% and 40% of total sale and their sale
prices are Rs. 1500 and Rs. 2000 respectively. Find the total combined
volume of sales for the business to break even if the fixed cost is Rs. 3 crore.
• Take weighted averages (WA) for prices and variable costs with weights as
per their sales. And use the standard method for finding break even point.
For the above case, the WA prices and variable costs are
1500*0.6+2000*0.4 = 1700 and 1000*0.6+2000*0.4=1400 respectively.
• 1700*BEP = 1400*BEP+300,00,000
BEP = 300,00,000/ (1700-1400) = 100,000 units.
 Market Structure
Question: The industry demand and supply functions for a particular product are given below. Find the market price. If
the marginal cost of a supply firm is given by the linear equation MC = -50+2Q find the level of production of the firm
for maximum profit. What is the profit amount? The Average Total Cost (ATC) trend of the firm has been tabulated below.
QD = 500 – 2P, QS = 200+4P. Assume a perfect competition market.
Quantity
(units) ATC (Rs.)
30 25
40 30
50 35
Solution:
Market Price
The market would operate at the equilibrium price where the demand and supply lines would meet.
QD = QS; 500-2P = 200+4P, 6P = 300, P = 50.
Marginal Cost Line
500
Level of Production
To maximise profit, the firm would operate at the level of production where MR = MC.
300
As the firm is operating in a perfect competition market, marginal revenue is equal to price.
Demand Line
50 = -50+ 2Q, Q = 50 100 Price Supply Line
Profit
50 300 500
Revenue = Price X Quantity = 50X50 = Rs. 2500.
Cost = ATC X Qty = 35 X 50 = Rs. 1750 (note that the ATC corresponding to the production of 50 units is 35.
Profit = 2500 – 1750 = Rs. 750.
 Market Structure
Q. The demand curve in a monopoly market is Q = 400 – 2P. The marginal cost (MC) is given by the equation MC = -100+3Q.
The ATC table is given below. What is the profit of the firm if it is working on a profit maximizing mode ?

Quantity
(units) ATC (Rs.)
50 100 Q = 400-2P; 2P = 400-Q, P=(400-Q)/2 = 200-Q/2
75 125
100 140

Solution:
The inverse demand curve is P = 200 – Q/2. The Marginal Revenue (MR) Curve is 200 – Q
The profit maximising firm would operate at the point where MR = MC
200-Q = -100+ 3Q Important Note
4Q = 300 If the inverse demand equation is P = a-bQ, the
Q = 75 Marginal revenue equation would be MR= a-2bQ
P = 200 – 75/2 = 162.5 Note that it applies only to the inverse demand equation
Profit = Total Revenue – Total Cost where P is on the left side.
= Price*Quantity – ATC* Quantity
= (Price – ATC)* Quantity = (162.5 – 125)*75 = Rs. 2812.5 (Note that ATC corresponding to Q=75, is 125.
 Game Theory
Question: The pay off matrix for two firms faced with the strategic decisions of advertising or not advertising is given below.
Does Firm A have a dominant strategy? Does B have a dominant strategy? What is the solution to the problem?
Firm B
Strategy Advertise Don’t advertise
Firm A Advertise 25,15 30,0
Don't advertise 15,20 40,5

Answer
Firm A does not have a dominant strategy, while B has one in advertising.
The two players would settle for advertising, as per the first.
 Macroeconomics
Question: Calculate GDPmp and GNPmp from the data given. NDPfc = 300, NFIA =5, GST = 20, Consumption of Fixed Capital
=30, Subsidies = 10.All figures in Rs. Crores.

Solution:
GDPfc = GDPmp – GST+Subsidies – (1)
GDPfc – Consumption of Fixed Capital = NDPfc
GDPfc = NDPfc + Consumption of Fixed Capital = 300+30 = 330
GDPmp = GDPfc + GST – Subsidies = 330+20 – 10 = 340 (Rs. Crore)
GNPmp = GDPmp + NFIA = 340+5 = Rs. 345 crore

Question: Calculate NDPfc and National Income (Net National Product at factor cost; NNPfc) given GNPmp = 400, Net Factor
Income paid to abroad = 10, Consumption of Fixed Capital = 30, GST=40 and subsidies = 10 (All figures in Rs. Crore)
Solution:
GDPmp = GNPmp – NFIA = 400 – (-10) = 410 (Note that the net factor income has been PAID to abroad, hence the negative sign)
NDPmp = GDPmp – Consumption of Fixed Capital = 410 – 30 = 380
NDPfc = NDPmp – GST+subsidies = 380 – 40+ 10 = 350 (Rs. Crore)
NNPfc = NDPfc + NFIA = 350+(-10) = 340 (Rs. Crore)