5.4 Break-Even Practice Questions

Text 2 — Hobthorn Pottery Ltd

Hobthorn Pottery Ltd (HP) is a private limited company that runs pottery workshop sessions in a converted mill in the Peak District. Customers book a three-hour session and take home the item they have made. Sessions are currently priced at £45 per person and HP sells around 180 sessions each month.

Hiba, HP's finance manager, monitors the break-even quantity for the sessions closely. She is considering spending £600 a month on social media advertising to attract more bookings, but is worried about the effect this would have on HP's costs. Nadia, the marketing manager, has suggested raising the price of a session to £52 instead.

Table 1 shows HP's forecast monthly costs for the workshop sessions.

Table 1

Fixed costs (rent, insurance, salaries)	£4500 per month
Clay and glaze per session	£8
Kiln firing and electricity per session	£7

Text 2 — Taunlow Print Ltd

Taunlow Print Ltd is a private limited company based in Taunton. It prints designs onto hoodies for schools, sports clubs and small businesses. Its best-selling product is the Classic hoodie, which is sold online and at local trade fairs.

The company is run by its managing director, Rowan Petrie, who checks the break-even quantity for every product before setting sales targets for the year. Taunlow Print Ltd currently sells around 310 Classic hoodies each month.

The supplier that sells Taunlow Print Ltd its plain hoodies has announced a price rise. Rowan is therefore considering increasing the selling price of the Classic hoodie from £26 to £29. Similar printed hoodies sold by competitors in the area are priced at around £30.

Financial data for the Classic hoodie is shown in Table 1.

Table 1

Classic hoodie
Selling price	£26 per hoodie
Variable costs	£11 per hoodie
Fixed costs	£46 800 per year

Ochreline Totes

Shona Okoro is a sole trader who owns Ochreline Totes. The business prints designs on cotton tote bags and sells them to gift shops across the north of England. Shona visits the shops herself to take orders.

Shona rents a small workshop and leases a printing machine. These costs, together with insurance, come to fixed costs of £40 000 a year. The workshop can produce a maximum of 10 000 bags a year. Shona expects to sell 8 000 bags next year and is using break-even analysis to help her plan.

Table 1: Ochreline Totes

Selling price per bag (to gift shops)	£12
Materials cost per bag	£4
Fixed costs per year	£40 000
Maximum output per year	10 000 bags
Expected sales next year	8 000 bags

Mardle Print Co

Jude Asante runs Mardle Print Co as a sole trader. The business prints T-shirts for sports clubs, schools and events in Bristol. Jude rents a printing unit and pays for insurance and an online shop each month. In June the business sold 500 T-shirts.

An online printing company has started offering similar T-shirts at lower prices. Jude thinks he may have to lower his price from £15 to £13 for all customers.

Table 1: Mardle Print Co, June

Selling price for each T-shirt	£15
Variable cost for each T-shirt	£6
Fixed costs for the month	£3 150
T-shirts sold	500

Kestle Ceramics

Bryony Tull is a sole trader who makes hand-glazed mugs in a studio in Cornwall. She sells them in her studio shop and online. Her fixed costs include the rent for the studio, the lease on her kiln and insurance.

In June the studio shop was open on 25 days. Bryony is planning a summer promotion for July, reducing the price of a mug from £15 to £12. She hopes the lower price will attract more visitors to the shop.

Table 1: Kestle Ceramics, June

Item	June
Fixed costs	£6 000
Selling price per mug	£15
Variable cost per mug	£7
Mugs sold	1 100
Days the shop was open	25

Lowmere Candles

Lowmere Candles is a small business in Shrewsbury that makes scented soy candles by hand. It was set up in 2022 by Lorna Fenn, a sole trader who works from a rented workshop on an industrial estate. Candles are sold at craft markets across the county and through the business's own website.

Lorna buys soy wax, glass jars, wicks and fragrance oils from a wholesaler. Her fixed costs include the rent on the workshop, insurance and the monthly fee for the website. In September Lorna sold 500 candles, her best month so far.

The wholesaler has told Lorna that the price of soy wax will rise next year because of poor harvests. This will add £0.50 to the variable cost of each candle. Lorna is deciding whether to increase the price of a candle to £12.50 or keep it at £12.00.

Table 1: Lowmere Candles, September

Item	Amount
Selling price per candle	£12.00
Variable cost per candle	£4.50
Fixed costs for the month	£2 625
Candles sold	500