Maxie Pty Ltd Makes and Sells Two Types of Shoes

question 43

Multiple Choice

Maxie Pty Ltd makes and sells two types of shoes, Plain and Fancy. Product data is as follows:
Sixty per cent of the sales in units are Plain and annual fixed expenses are $45 000 and the sales mix remains constant. Assume an income tax rate of 20 per cent.
The break-even point for this data is 5000 units in total. How will the calculation of the break-even point change (if at all) if the relative percentages of the products in the mix change from 60 per cent Plain shoes to 40 per cent Fancy shoes?

• A) The break-even point in total will not change. The only change will be the relative number of each of the units.
• B) Neither the break-even point in total nor the relative number of each of the units to produce at break-even will change.
• C) The break-even point will change because the calculation above assumes a constant mix, namely 60 per cent to 40 per cent.
• D) The break-even point will be higher.

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Definitions:

Profitability Index

A financial tool that calculates the ratio of the present value of future expected cash flows to the initial investment cost.

Working Capital

A disparity between a firm's current holdings and its outstanding obligations, signifying its short-term economic fitness and effectiveness in functioning.

Discount Rate

In the context of discounted cash flow analysis, this is the interest rate used to establish the present-day value of future cash inflows.

Net Operating Cash Inflows

This represents the cash that a business generates from its ordinary, operational activities, excluding financing or investment cash flows.