The Dreamwheel Cycle Company is considering manufacturing a new bicycle and has prepared the following estimates of cost and selling price:

Fixed overheads have been estimated by the company and represent both the apportionment of the company’s existing fixed overheads to the new bicycle and the additional fixed costs incurred in the event of manufacture. Expansion beyond 7000 units will require the rental of additional premises and further additional fixed costs as shown above. Maximum production and sales are estimated at 9,000 units.

(a) Prepare a break-even chart for the bicycle identifying clearly the break-even points, and identify the profits (or losses) that would be made with sales of 6000 units and 8500 units.

(b) Comment on the results shown by the chart and interpret the key points shown by the chart for management together with any limitations in your analysis.

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Unit labour cost Unit material cost Unit packaging cost Proposed selling price 20.00 15.00 5.00 80.00 Budgeted fixed cost per period 0-7000 units 150,000 7001 units and above 320,000