Cottage Industries Ltd (see Example 7.1) expects to sell 500 baskets a month. The business has the opportunity to rent a basket-making machine. Doing so would increase the total fixed cost of operating the workshop for a month to £3,000. Using the machine would reduce the labour cost to £5 per basket.

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

Without the machine; and

With the machine?

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

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

Data from Example 7.1

Cottage Industries Ltd makes baskets. The fixed cost of operating the workshop for a month totals £500. Each basket requires materials that cost £2. The business pays the basket makers £10 for each basket completed. The basket makers are all on contracts that stipulate if they do not work for any reason, they are not paid. The baskets are sold to a wholesaler for £14 each.

What is the BEP for basket making for the business?