A pottery business sells clay pots for $3 each. It expects to produce and sell 5,000 pots this year, although there is a total production capacity of 7,500. Fixed costs are $4,000 per year. The variable costs of production are $1.50 per pot.

Draw a break-even graph to represent this data, identifying the break-even level of production and the margin of safety.

The manager is considering two options in an effort to increase profits:

• Purchase a new energy-efficient kiln. This would raise fixed costs by $1,000 per year but reduce variable costs to $1.20 per pot. The output would remain unchanged.
• Reduce the price by 10%. Market research indicates that this could raise sales by 20%.

By drawing two new graphs, compare the break-even points of all three situations (including the original), the total levels of profit, and the safety margins.

Answer rating: 100% (QA)

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