The Colour Flow Ltd’s income statement for the preceding year is presented below. Except as noted, the cost/revenue relationship for the coming year is expected to follow the same pattern as in the preceding year. Income statement for the year ending March 31 is as follows: 

Profit after tax 65,000
1. What is the break-even point in amount and units?
2. Suppose that a plant expansion will add R 50,000 to fixed costs and increase capacity by 60 per cent. How many bottles would have to be sold after the addition to break-even?
3. At what level of sales will be company be able to maintain its present pre-tax profit position even after expansion?
4. The company’s management feels that is should earn at least R 10,000 (pre-tax per annum) on the new investment. What sales volume is required to enable the company to maintain existing profits and earn the minimum required return on
new investments?
5. Suppose the plant operates at full capacity after the expansion, what profit after tax will be earned?

The break-even point is the level of sales at which total revenue equals total costs, resulting in zero profit. The formula for break-even point in units is:

Break-even point (units) = Fixed costs / Contribution margin per unit

where Contribution margin per unit = Selling price per unit - Variable cost per unit

Contribution margin per unit = R25 - R15 = R10

Break-even point (units) = R1,00,000 / R10 = 10,000 units

So, the break-even point in units is 10,000 units. To calculate the break-even point in amount, we can simply multiply the break-even point in units by the selling price per unit:

Break-even point (amount) = 10,000 units x R25 per unit = R2,50,000

Therefore, the break-even point in amount is R2,50,000.

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