[Question 3]

Provision plc makes luxury hampers for sale in a chain of high-class department stores. The following financial information is available:

Wholesale price	$80 per hamper
Labour and material costs	$15 per hamper
Bought-in components	$25 per hamper
Overheads	$800,000 per year

Current output and sales are set at 30,000 hampers per year, though the firm has the capacity to produce 50,000 hampers per year.

a) Calculate the break-even quantity for the firm. (5 marks)

b) Draw and fully label the break-even chart for the business. (8 marks)

c) Identify the margin of safety. (2 marks)

d) Calculate the level of profit the firm is making. (5 marks)

Sales go well, but the buyer puts pressure on Provision to reduce its prices. In the following financial year Provision expects sales to reach 40,000, but at a price of $75 per hamper. Labour and materials costs, and bought-in items are expected to rise in price by 15%, but Provision is planning to cut its fixed costs by 10%.

e) Calculate how these changes will affect Provision's break-even quantity, margin of safety and profitability. (5 marks)