1. You are a high-end artisan coffee roaster. Your business is very successful and have recently been in talks with a high end retailer to produce a new exclusive coffee. You currently sell a unit of coffee for £75. In order to produce the new exclusive coffee for your client, you need new advanced machines. You are unsure whether to pursue this opportunity due to the cost of trade-offs, as it is unknown whether you could increase the selling price. However, due to access to this new market there is the potential to sell a larger number of units. The table below sets out the current and exclusive coffee costs and selling price.
Current Coffee Exclusive New Coffee
Fixed cost £25,500 £46,000
Variable cost £50 £50
Selling price £75 £75
Please answer:
(a) What is the break-even amount of units for the Current Coffee
(b) What is the break-even amount of units for the Exclusive New Coffee
(c) Due to the difference in break-even amount between the two processes (current coffee and exclusive new coffee) you are slightly concerned you could be operating at a loss. You manage to reduce your variable costs for the new exclusive coffee to £30. What is the minimum number of units that you need to produce to justify the fixed cost investment of £46,000 for the Exclusive New Coffee (i.e., in order to not operate at a loss)?