A pottery business sells clay pots for $3 each. It expects to produce and sell 5 000 pots this year, although here is a total production capacity of 7,500. Fixed costs are $4,000 per year. The variable costs of production are $1.50 per pot.

1.Construct a break-even graph to represent these data, identifying the break-even level of production and the safety margin.

2.The manager is considering two options in an effort to increase profits:

Purchase a new energy-efficient kiln. This would raise fixed costs by $10,00 per year but reduce variable costs to $1.20 per pot. Output would remain unchanged.

Reduce price by 10%. Market research indicates that this could raise sales by 20%.

By drawing two new graphs, compare the break-even points of all three situations (including the original), the total levels of profit and the safety margins. Advise the firm, on the basis of your results, whether to remain as it is or to adopt one of the two new options above. Justify your answer.