Phuong Nguyen runs a commercial kitchen that produces a range of bottled Vietnamese cooking sauces that are sold in major retail food stores across the country. Past accounting records show that the business, Phuong’s Fantastic Foods Pty Ltd, has been profitable. The bottles of sauces come in a range of flavours, but they all cost a similar amount to make and are sold for the same price regardless of flavour. The kitchen includes equipment such as ovens, stoves, refrigerators, freezers and automatic chopping and stirring machines, as well as sterilising and bottling equipment. Phuong has been very satisfied with the way the business has grown and the good reputation the sauces enjoy across the country, regularly being featured on television lifestyle shows. However, no records exist to show how many cartons of sauces, each containing 24 bottles, need to be sold so that the business will break even each year. This means Phuong has no idea of his margin of safety.

Required

As a group, consider how a break-even point based on the number of cartons of sauces could be calculated. Also consider and summarise the typical expenses associated with the running of a commercial kitchen and how they would fluctuate with the level of sales. Consider which types of costs are fixed, variable and mixed and list some of them.

As a group, write a letter explaining the procedures Phuong should follow to be able to determine a break-even number of cartons of sauces.