Page 4 - CIMA OCS August 2018 Day 2 Suggested Solutions

CIMA AUGUST 2018 – OPERATIONAL CASE STUDY

Points marked as E:

Points marked as E are the break-even points on each line. These are the points at which neither a
profit nor a loss is expected to be made.
Looking at the chart one can see that the break-even point on the straight line is where revenue is
approximately D$93m.
This means that revenue can fall to this level from the expected level of D$144m before we reach
the point where fixed costs are not covered by contribution.
The margin of safety is the amount by which revenue can fall from the expected revenue before a
loss is made, usually measured as a percent - here, revenue can drop by approximately 35%
before we no longer make a profit.
The line ABCD has a different break-even point to the straight line AD. Here the break- even
position is where revenue is approximately D$84m. This means that revenue could fall to this
from the expected total of D$144m before a loss starts to be made.

The usefulness of this multi-product break-even chart
Overall the chart is useful because it gives an idea of the level of revenue at which we will make
neither a profit nor a loss.
This is not particularly relevant as the safety margin is reasonably high at 35%. Our c/s ratios are
high and fixed element of cost of sales is not excessive either (as shown by high gross profit
margins) and, furthermore, our products are very well established in the market.
The graph could be used to emphasise the need to boost revenue and/or reduce fixed costs to
reduce the risk of becoming loss-making.
The multi-product line ABCD, however, is less useful as we do not have the option of prioritising
products - it is nonsensical to suggest we would only consider selling black tea once targets for
sales of green tea bags had been achieved.
Furthermore, there are some factors which limit the usefulness of this break-even analysis that
you need to be aware of:
1. The figures used are estimates only and do not incorporate any gain in customers due to
fashion shows, for example.
2. The analysis assumes that we can define costs as fixed or variable. In reality all costs are
variable in the long term and even in the short term many costs that we think of as variable are
fixed (for example, labour costs).
Ana’s comments
One of the main things to come out of Ana’s graph is that black tea sales (line segment BC)
generate the greatest contribution. In a market where black tea sales are expected to be static or
decline, it is vital that greater inroads are made for green teas and infusions. Either by increasing
sales of existing blends or expanding the product range.

I addressed the issue of safety margin above – revenue can fall by 35% before a loss results.
Infusions have the lowest c/s ratio and this is reflected by the line CD having a lower gradient than
either AB (green teas) or BC (black teas). In that respect it could be said that the performance of
infusions is disappointing , emphasising the need to be able to either put up[ prices for infusions
(say by developing new blends) or reducing costs (say by using suppliers outside of Deeland.

60 KAPLAN PUBLISHING