Question

Luke Corporation produces a variety of products, each within their own division. Last year, the managers at Luke developed and began marketing a new chewing gum, Bubbs, to sell in vending machines. The product, which sells for $5.60 per case, has not had the market success that managers expected and the company is considering dropping Bubbs.

The product-line income statement for the past 12 months follows:

Revenue				$	14,692,650
Costs
Manufacturing costs	$	14,443,895
Allocated corporate costs (@5%)		734,633			15,178,528
Product-line margin				$	(485,878	)
Allowance for tax (@20%)					97,175
Product-line profit (loss)				$	(388,703	)

All products at Luke receive an allocation of corporate overhead costs, which is computed as 5 percent of product revenue. The 5 percent rate is computed based on the most recent year’s corporate cost as a percentage of revenue. Data on corporate costs and revenues for the past two years follow:

	Corporate Revenue		Corporate Overhead Costs
Most recent year	$	113,750,000	$	5,687,500
Previous year	$	76,900,000		4,902,595

Roy O. Andre, the product manager for Bubbs, is concerned about whether the product will be dropped by the company and has employed you as a financial consultant to help with some analysis. In addition to the information given above, Mr. Andre provides you with the following data on product costs for Bubbs:

Month	Cases	Production Costs
1	213,500	$1,151,328
2	220,700	1,173,828
3	218,400	1,182,481
4	234,500	1,198,023
5	250,400	1,200,327
6	243,500	1,221,173
7	223,700	1,196,199
8	250,700	1,239,274
9	242,300	1,237,726
10	256,100	1,249,825
11	253,700	1,254,260
12	262,700	1,284,951

1. Calculate the break-even for Bubbs in cases per month based on production fixed costs and the Contribution Margin calculated above.

2. Write out a profit formula for Bubbs using Q, CM, and FC as in the prior question. For the desired profit note the after tax profit is .05 P Q / (1-TX), where P is the selling price per case and TX is the tax rate. Now solve for Q to determine the number of case Bubbs must produce and sell per month to earn a 5% return on revenues

Answer 1