12.5 Read this extract and then answer the questions that follow:

Chase Distillery is extending its product range beyond potato vodka. Apple-based vodka and gin and marmalade-flavoured potato vodka have also started rolling off the production line at a plant which to date has produced just 1,000 bottles a week. Mr Chase admits this is just a ‘drop in the ocean’. But the distillery is aiming to produce 4,000 bottles a week by the end of the year. Only the high margins offered by premium brands can justify £4 a litre production costs at his distillery, which compares with 30p a litre cost of cheaper rivals. The venture, which employs six full-time staff, lost £600,000 last year, but is scheduled to break even by next year. Mr Chase concedes the real trick to creating a spirits business … is to increase exports, particularly to North America.

(a) Assuming that Chase Distillery’s annual fixed costs were equivalent to the amount lost on the venture last year plus £250,000 to promote the brand in North America, and that each litre of vodka produced will sell at £10, calculate by formula the number of litres that need to be sold to break even next year.

(b) Prepare a break-even chart showing the forecast information for next year.
Assume that the distillery produces vodka at 4,000 litre bottles a week for 50 weeks of the year.

(c) Assume that you are advising Chase Distillery. Explain the significance of the margin of safety as shown on the break-even chart.