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    Bep Pottery Mark Scheme

    Uploaded by

    Malhar Kookada
    The document provides information about a pottery business's costs and revenues under its current model and two alternative options. Currently, the business makes a $3,500 profit selling 5,000 pots at $3 each with fixed costs of $4,000 and variable costs of $1.50 per pot. Option 1 is purchasing a more efficient kiln, raising fixed costs by $1,000 but lowering variable costs to $1.20 per pot. Option 2 is reducing price by 10% and increasing sales by 20%. Analyzing profits, break-even points, and margins of safety for each option indicates purchasing the kiln would be best as it provides the highest profit despite a higher break-even quantity and lower margin of

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    Bep Pottery Mark Scheme

    Uploaded by

    Malhar Kookada
    31 views3 pages
    The document provides information about a pottery business's costs and revenues under its current model and two alternative options. Currently, the business makes a $3,500 profit selling 5,000 pots at $3 each with fixed costs of $4,000 and variable costs of $1.50 per pot. Option 1 is purchasing a more efficient kiln, raising fixed costs by $1,000 but lowering variable costs to $1.20 per pot. Option 2 is reducing price by 10% and increasing sales by 20%. Analyzing profits, break-even points, and margins of safety for each option indicates purchasing the kiln would be best as it provides the highest profit despite a higher break-even quantity and lower margin of

    Original Description:

    Business management Notes

    Original Title

    BEP_POTTERY_MARK_SCHEME

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    The document provides information about a pottery business's costs and revenues under its current model and two alternative options. Currently, the business makes a $3,500 profit selling 5,000 pots at $3 each with fixed costs of $4,000 and variable costs of $1.50 per pot. Option 1 is purchasing a more efficient kiln, raising fixed costs by $1,000 but lowering variable costs to $1.20 per pot. Option 2 is reducing price by 10% and increasing sales by 20%. Analyzing profits, break-even points, and margins of safety for each option indicates purchasing the kiln would be best as it provides the highest profit despite a higher break-even quantity and lower margin of

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    31 views3 pages

    Bep Pottery Mark Scheme

    Uploaded by

    Malhar Kookada
    The document provides information about a pottery business's costs and revenues under its current model and two alternative options. Currently, the business makes a $3,500 profit selling 5,000 pots at $3 each with fixed costs of $4,000 and variable costs of $1.50 per pot. Option 1 is purchasing a more efficient kiln, raising fixed costs by $1,000 but lowering variable costs to $1.20 per pot. Option 2 is reducing price by 10% and increasing sales by 20%. Analyzing profits, break-even points, and margins of safety for each option indicates purchasing the kiln would be best as it provides the highest profit despite a higher break-even quantity and lower margin of

    Copyright:

    © All Rights Reserved
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    MARK SCHEME FOR THE POTTERY

    A pottery business sells clay pots for $3 each. It expects to produce and sell 5 000 pots this year. Fixed
    costs are $4 000 per year. The variable costs of production are $1.50 per pot.

    1. Draw a break-even level of production and the safety margin. [6]

    Sales Revenue = $3 x 5 000 = $15 000 BREAK-EVEN CHART FOR THE POTTERY
    Revenue/cost
    Total Cost = (fixed cost) 4 000 + ($1.50 x 5 000) 7 500 = $11,500 I SR
    I
    Profit = 15 000 – 11,500 = $3,500 I TC
    I
    BEQ = 4000 I
    3 – 1.50 = 2 667 pots I MOS I
    I I FC
    Margin of Safety = 5 000 - 2,667 = 2 333 pots I I
    0 2 667 5000
    Number of clay pots

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

    OPTION 1: KILN

    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. Output would remain unchanged.

    Sales Revenue = $3 x 5 000 = $15 000

    Total Cost = FC (4 000 + 1000) 5 000 + ($1.20 x 5 000) 6 000 = $11


    000

    Profit = 15 000 – 11 000 = $4 000

    BEQ = 5 000 5 000


    3 – 1.20 1.80 = 2,778 pots

    Margin of Safety = 5 000 – 2,778 = 2 222 pots


    OPTION 2: REDUCE PRICE

    Reduce price by 10%. Market research indicates that this could raise sales by 20%.

    Sales Revenue = (10% of $3) therefore 3 – 0.30 = $2.70


    (20% of 5 000 = 1 000) therefore 5 000 + 1 000 = 6 000
    $2.70 x 6 000 = $16 200

    Total Cost = (original FC) 4 000 + (1.50 x 6 000) 9 000 = $13 000

    Profit = 16 200 – 13 000 = $3 200

    BEQ = 4 000 4 000


    2.70 – 1.50 1.20 = 3 333 pots

    Margin of Safety = 6 000 – 3 333 = 2 667 pots

    (b) Advise the firm, on the basis of your results, whether to remain as it is or to adopt one of the
    two options above. Justify your answer. [10]

    WHICH OPTION IS BEST?

    ORIGINAL OPTION 1 OPTION 2


    PROFIT $3,500 $4 000 $3 200
    BREAK-EVEN 2 667 pots 2 778 pots 3 333 pots
    MOS 2 333 pots 2 222 pots 2 667 pots

     Buying the Kiln would increase FC and reduce VC … resulting in higher profit .. BUT more pots
    need to be sold to break even and a lower margin of safety.
     Reducing the price will result in the lowest profit, despite an increase in demand because the
    total cost has increased and the highest number of pots must be sold to break-even.

    CONCLUSION: Buying the Kiln would be a better option because:


     Makes the most profit
     Although Break-even quantity increases and lower MOS
     The TC is reduced

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