Question

Topic: Break even (1)

Crystal Clear is concerned about the recent rise in the price of aluminium - the metal from
which the business make the frames for its greenhouses. This price rise has meant that the
firm's variable costs have risen from £60 to £100 per small greenhouse. Fixed costs and the
selling price per unit however, have remained unchanged.
Q3
Activity: Calculate:
a) the percentage change in the firm's variable costs (give your answer to two decimal places)
b) the new number of Crystal Clear's smallest greenhouses that would need to be sold per
month for the business to break even
our workings:

Answer 1

a) the percentage change in the firm's variable costs is 66.67%.

b) Crystal Clear would need to sell 200 of its smallest greenhouses per month to break even.

Explanation:

a) The percentage change in variable costs can be calculated using the formula:

((New Value - Old Value) / Old Value) * 100%

Substituting the values, we get:

((£100 - £60) / £60) * 100% = 66.67%

Therefore, the percentage change in the firm's variable costs is 66.67%.

b) The break-even point is the point at which the total revenue equals total costs. The total cost is the sum of fixed costs and variable costs.

Let's assume that the fixed costs for Crystal Clear are £10,000 per month. Then, the total cost can be calculated as:

Total Cost = Fixed Cost + (Variable Cost per unit * Number of units)

We can rearrange this formula to find the number of units:

Number of units = (Fixed Cost + Total Cost) / Variable Cost per unit

At the break-even point, the total revenue equals the total cost. Let's assume that the selling price per unit is £150. Then, the break-even point can be calculated as:

Total Revenue = Total Cost

Number of units * Selling Price per unit = Fixed Cost + (Variable Cost per unit * Number of units)

Number of units * £150 = £10,000 + (£100 * Number of units)

Number of units * (£150 - £100) = £10,000

Number of units = £10,000 / £50

Number of units = 200

Therefore, Crystal Clear would need to sell 200 of its smallest greenhouses per month to break even.