Intermediate: Break-even chart with an increase in fixed costs and incorporating expected values A manufacturer is considering a new product which could be produced in one of two qualities - Standard or De Luxe. The following estimates have been made:

At the proposed selling prices, market research indicates the following demand:

You are required

(a) to draw separate break-even charts for each quality, showing the break-even points;
(7 marks)

(b) to comment on the position shown by the charts and what guidance they provide for management; (3 marks)

(c) to calculate, for each quality, the expected unit sales, expected profits and the margin of safety; (3 marks)

(d) using an appropriate measure of risk, to advise management which quality should be launched.LO1

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Standard De Luxe () () Unit labour cost Unit material cost 2.00 2.50 1.50 2.00 Unit packaging cost 1.00 2.00 Proposed selling price 7.00 10.00 per unit Budgeted fixed costs per period: 0-99 999 units 200 000 250 000 100 000 and above 350 000 400 000