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a) (i) Define break - even point

Break - even point is when the total sales from products or services are equal tototal cost incurred by the business. There are three ways to calculate the break –

even point: table, graph and formula.

a) (ii) Calculate the break – even point using formula

Fixed cost

Break – even point = ------------------------------------------------

Selling price – variable cost per unit

Fixed costVariable cost (^) == £ 0.70£250. Selling priceContribution == £ 0.80£ 1.

Break – even point = --------------------------250. 1.50 – 0. = -------------------------250.

= 312.500 cards

b) Draw break even chart, showing clearly the break even point and themargin of safety at a sales level of 450.000 units

Whitehouse Crafts activity table Number of card sold 0 250.000 500. Fixed cost 250.000 250.000 250.000 250. Variable cost £ 0.70 0 175.000 350. Total cost 250.000 425.000 600. Total sales £1.50 0 375.000 750.

c) Calculate profit / loss from sales of 400.000? Show this on the graph.

e) What would be the impact of a drop in price from £1.50 to £1.40?

Fixed cost

Break even formula = -------------------------------------------------Selling price – variable cost per unit

Fixed costVariable cost == £ 250.000£ 0.

New selling price = £ 1.

Contribution = £ 0.

Break even Point = ------------------------------

= 357,143 cards

If the price drops from £1.50 to £1.40 per card the company will have to sell more to

break – even. They will have to sell 357,143 thousands cards to reach break – evenpoint , everything beyond that will be a profit.

The customers might be more attracted to lower price and buy more , so the

business might sell more in total and make bigger profit.

f) In addition to price drop ( in part e ) what would be the impact of an

increase in labour cost to £10p?

Break even formula = -------------------------------------------------^ Fixed cost

Selling price – variable cost per unit

Fixed cost = £ 250.

Variable cost = £ 0.

New selling price = £ 1.

Contribution = £ 0.

Break even Point = ------------------------------

= 367,648 cards

If the variable cost change to £0.72 per unit , the business will have to spend more to

produce cards , as the price drops as well to £1.40 the break – even point will

change to 367,648 cards and Whitehouse Crafts must sell more than that to make aprofit.