Case study:

Manestic Industries Ltd makes baskets. The fixed costs of operating the workshop for a month total 1 400. Each basket requires materials that cost 4. Each basket takes one hour to make, and the business pays the basket makers 10 an hour.

The basket makers are all on contracts such that if they do not work for any reason, they are not paid. The baskets are sold to a wholesaler for 28 each.

(a) What is the BEP for basket making for the business?

(b) Can you think of reasons why the managers of a business might find it useful to

know the BEP of some activity that they are planning to undertake?

Manestic Industries Ltd expects to sell 600 baskets a month.

The business has the opportunity to rent a basket-making machine. Doing so would increase the total fixed costs of operating the workshop for a month to 5 700. Using the machine would reduce the labour time to half an hour per basket. The basket makers would still be paid 10 an hour.

(c) How much profit would the business make each month from selling baskets

(i) assuming that the basket-making machine is not rented, and

(ii) assuming that it is rented?

(d) What is the BEP if the machine is rented?

(e) What do you notice about the figures that you calculate?