DEPARTMENT OF CIVIL ENGINEERING

CE2451 / ENGINEERING ECONOMICS AND COST ANALYSIS

IMPORTANT QUESTION WITN ANSWER

VOLUME-I

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UNIT-V

PART-A

1.What do you mean by break even analysis?

It is a tool for analyzing the financial aspect whereby the impact on profit of the changes in volume price costs and sales mix can be estimated with higher level accuracy.

2. Define margin of safety.

Margin safety may be defined as the excess of actual sales or production at the selected activity over break even sales or production. Simply margin of sales is excess sales over the break even sales .it is abbreviated as mos.

3. What is p/v ratio?

It is an important tool in decision making. It is used for the calculation of BEP and in problems regarding profit and sales relationship. A higher P/V ratio indicates the greater profitability and vice versa. So the organization makes necessary effort to obtain higher p/v ratio.

4. What is making or buy decision?

The outside price of the component is lower than the marginal cost of producing it is worth buying , if the outside price is higher than the marginal cost making the component in the factory may be preferred.

5. What is angle of incidence?

It indicates the profit earning capacity the angle is formed at the breakeven point where the sales line cuts the total cost line . The angle may be large or small. Large angle of incidence indicates higher profit rate and vice versa.

6. Write the merits and demerits on break even chart.

Assumption- all costs are segregated into fixed and variable cost. Total fixed costs are constant at all levels of output, production and sales figures are same variable costs vary proportionately with the level of volume of output.

Merits- preparation of flexible budget, formulation of price policy, it provides guidance for cost control, total profit could be calculated accurately.

Demerits- fixed cost does not always remain constant, it ignores economies of scale in production, and variable cost does not always vary proportionately.

7. What are the managerial uses of break even analysis?

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It is very useful for forecasting and profits. Long term planning and growth the chart discloses profits at various levels of production. It can also be used to study the comparative plant efficiencies of the industry.

8. Differentiate market price and normal price.

Market price prevails in the very short period

It is the result of temporary equilibrium between demand and supply Market price is more influenced by demand

Market price fluctuates even daily

All commodities reproducible or non reproducible have a market price Normal price- it prevails in the long period, it is the result of long period

equilibrium, it is largely influenced by supply and cost of production, it is stable, it is equal to the cost of production, reproducible commodities alone have normal price.

9.what is demand?

Demand can be represented graphically, as a line with price on the y axis and quantity demanded on the x axis. It can also be represented in a table, known as a  demand schedule.

Price and demand almost always have an inverse relationship. As the price of a good goes up, the demand goes down.

There are many factors other than price that influence demand. Some examples are tastes and preferences, disposable income, and the price

10. What is the significance elasticity of demand?

The demand of a particular product change when there is a change in price or when there is a change in income of household’s price of related goods, tastes and expectations advertising expenses etc.

11. . What is the various elasticity’s of demand?

Price elasticity of demand, income, cross, promotional, exportations elasticity of demand.

12. What is supply?

The amount of that product which producers are able and willing to offer for sale at a given price.

13. . What is supply schedule?

Supply schedule that as the price increases, each firm supplies greater quantity of output to the market and vice versa.

14.What is supply curve? Or supply shift

It is the graphical representation of the supply schedule, the market supply curve summarizes the total quantity all producers are willing and able to produce at different alternative prices holding other factors such as competition, technology, government factors taxes etc that affect supply as constant.

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15. Explain limitations of law of supply.

As it was in demand law of supply too has its limitation some of them are listed here

Future prices, agricultural outputs, factors other than price not remaining constant.

16. What are the factors in supply shift?

Variable that affects the position of the supply curve are called , these include

Price of inputs, level of technology, government regulation, competition of number of firms, taxes, producer expectation, substitutes in production.

17. What is elasticity of supply?

The degree of responsiveness of supply to a given change in price.

18. What are the types of supply elasticity?

Perfectly elastic supply, perfectly inelastic supply, unitary elastic supply , relatively elastic supply, relatively inelastic supply.

19.How is cost-volume-profit relationship determined?

The most important method of determining cost-volume-profit relationship is Break even Analysis.

20.Write down the limitations of break even Analysis?

BEP Analysis assumes costs and revenue to be linear in function. This practice is not true.
Break Even Chart is useful only for single product companies