Reference no: EM132861191

Read the case study information below and answer the questions that follow.

DECISION TIME AT THE POTTERY

A pottery business sells clay pots for $3 each. It expects to produce and sell 5 000 pots this year, although here 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.

1. Construct a break-even graph to represent these data, identifying the break-even levelof production and the safety margin.

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

Purchase a new energy-efficient kiln. This would raise fixed costs by $1000 per year but reduce variable costs to $1.20 per pot. Output would remain unchanged.

Reduce 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