Mr Ahern’s Break Even Contribution Tasks

A.

Mark wants to sell toffee apples at bonfire night from the big local firework display. The local council are

charging £45 for the stand rent and permit to trade. His apples cost £1 for a pack of 4 and the price of

toffee for each apple is 45p. He intends to sell them at £1.50 each. Mark can only afford to buy 80 apples

and toffee for bonfire night, although he is positive he will sell them all. Using the contribution method

calculate how many will Mark need to sell to break-even.

B.

Johnson’s brewery brews and distributes premium real ale that sells at £2.60 per pint. All the ingredients

used to make it cost £1.62 per pint. The brewery and bar rent is £1,200 per month. Electricity and other

rates are set at £345 per month. It’s a family business and all staffing costs are £445 per month.

Last month Johnson’s bar sold 2130 pints of ale.

Did Johnson’s bar run at a profit last month? Using the contribution method calculate this

C.

Chantelle is looking in to starting a new business by opening a record shop. She has done some research

and realised that although records are a dead technology, there is a niche in the market within the north

east. New records are sold to her wholesale at £1.30 and retail at £4.50. Chantelle is aware that she may

be able to stumble across some second hand records from time to time but initially is going to rely purely

on revenue from new record sales from the wholesaler. The rent of the shop is £240 per calendar month

with fixed rates at £80 There are no wages to be paid at first as Chantelle has just finished college and

intends on running and working the store herself. She predicts she will sell 120 records to start with in the

first month.

1. Using the contribution method calculate the break-even point, to give to Chantelle an indication of how

many records she will need to sell and if she sells 120, what kind of profit will she make?

2. Chantelle also anticipates providing only one bag for ever 2nd customer, as research suggests some

customers will not require bags or buy more than one record at a time. Bags cost her 20p each as they

have her store name printed on them. Do the same calculation as before but with the added variable cost

of the bags.

D.

Black and Decker have set up a brand new production plant making cordless drills. The new cordless drill

retails at £55. The components used to make the drill cost £21.25 and the packaging costs £3.75 per drill.

The new drill has its own national marketing campaign costing £75,000 which is mainly composed of

posters for retailers to use in store. The factory rent is £260,000 and the management and workforce

salary equates to £165,000.

1. Using the contribution method, how many drills will need to be sold to break-even?

2. In year 2 they intend to increase the retail price by £10 meaning the drill will now retail for £65, using the

same chart show you just made show this including any margin of safety if there is any