IB Business Management SL 5.5 Break Even Analysis Topic Practice

Alfombras Horizonte (AH)


Alfombras Horizonte (AH) produces natural henequen* rugs in Yucatán, Mexico, and sells them online. AH rugs are very popular among young people because of their eco-friendly materials and AH's mission statement: "We are responsible with Mother Earth for our environment and ourselves."
In 2022, A H 's costs increased, but it kept prices unchanged. For 2023, A H decided to change its pricing

strategy and pass on all cost increases to customers.

* henequen: a fibre plant from Mexico and Guatemala. Fabrics made from henequen fibre are used to make a wide variety of products, including bags, rugs and hammocks.

Klar


Klar is a factory that bottles mineral water for use in large water dispensers. The factory is located on a hill next to a spring from where water flows naturally. Klar uses a flow production method with a production capacity of 35 million litres per year. Klar has a 60 % share of the national market and also exports bottled mineral water to several countries.
A multinational company called Kaiser is interested in acquiring Klar. "If the acquisition takes place, we will expand Klar's production to gain economies of scale; we will also add a new range of flavoured drinks that will be produced in batches and sold in 1.5 litre bottles. Our maximum production capacity of flavoured drinks will be 3 million bottles a year," says Roman Hitschfeld, Kaiser's Production Manager.
The forecast costs for producing Klar's new flavoured drinks are as follows:
- variable cost per bottle: $\$0.4$
- estimated sales price per bottle: $\$1.6$
- fixed costs: $\$240000$.
Klar is facing fierce competition from other companies that use plastic bottles and offer lower prices to consumers. Although the cost of glass bottles is higher than plastic ones, up until now Klar has only used re-useable glass bottles to support its ethical objectives of being environmentally-friendly. Now, Klar is considering switching from re-useable glass bottles to non re-useable plastic ones. The environmental pressure group Plastic No More! is campaigning against the use of plastic. A spokesperson from Plastic No More! said: "there is a growing trend among consumers to purchase products that will not damage the environment, but we are still a minority".

Hums Athletics (HA)


Hums Athletics (HA) manufactures running shorts, sweat shirts, and sports bras. Operating only in the secondary sector, HA has a head office and three manufacturing facilities, one for each product. These are located in its home country in Europe. Labour costs are high. The quality of labour is excellent.
HA produces goods under its own HA brand, which it sells to wholesalers. HA also manufactures for other sportswear companies. HA puts the other sportswear companies' logos on the running shorts, sweat shirts, and sports bras. Sales to other sportswear companies are an important revenue stream for H A.
HA has many levels of hierarchy. Managers at each level have a narrow span of control, and the company is organized by product. HA's management believe that these features of organizational structure ensure product quality, which they view as essential for brand loyalty.
The sportswear manufacturing industry is becoming more competitive. Some foreign manufacturers have begun using penetration pricing to gain market share. For three years, none of HA's revenue streams have increased, despite increasing unit sales. HA's gross and net profit margins have declined. However, its sales have increased for the last three years. HA has had to raise additional external finance to increase production.
In response to the increasing competition, H A is considering two options:
- Option 1: Outsourcing some of its manufacturing overseas.
- Option 2: Entering the rapidly growing online business-to-consumer (B2C) retail market.
Market research has shown that consumers increasingly expect to buy online.

Explain:

the impact of price changes by foreign competition on H A 's break-even point;