Question

Jen & Berry’s sold 100,000 pints of ice cream last month according to the following contribution format income statement

Total Per Unit

SALES    $330,000    $3.30

VARIABLE COSTS 200,000 2.00

CONTRIBUTION MARGIN $ 130,000 $ 1.30

FIXED COSTS 50,000

NET INCOME $ 80,000

A competing company, Un-Friendly’s, also sold 100,000 pints of ice cream last month according to the following contribution format income statement:

Total Per Unit

SALES $255,000 $2.55

VARIABLE COSTS 100,000 1.00

CONTRIBUTION MARGIN $ 155,000 $ 1.55

FIXED COSTS 75,000

NET INCOME $ 80,000

Both companies sold the same amount of ice cream and had the same Net Income but have different price and cost structures. Jen & Berry’s uses higher quality ingredients (variable cost) and charges a higher price than its competitor. Un-Friendly’s spends more on advertising (fixed cost) and sells at a lower price than Jen & Berry’s.

5.Using last month’s income statements on page 2, calculate the safety margin in units (pints of ice cream) for each company.

6.Jen & Berry’s is considering two options to increase sales next month (and hopefully profit):

Option #1:

Double the pints sold next month by decreasing the price by 15 cents to $3.15.

Option #2:

Double the pints sold next month by spending an additional $20,000 next month

(fixed cost) on advertising. Price of ice cream remains at $3.30 per pint.

Which option should Jen & Berry’s choose?? Explain your answer by showing calculations for both options.

7.Un-Friendly’s is considering the same two options to increase sales next month (and hopefully profit):

Option #1:

Double the pints sold next month by decreasing the price by 15 cents to $2.40.

Option #2:

Double the pints sold next month by spending an additional $20,000 next month

(fixed cost) on advertising. Price of ice cream remains at $2.55 per pint.

Which option should Un-Friendly’s choose?? Explain your answer by showing calculations for both options.

Answer 1

Contribution Margin per unit = Selling Price - Variable Cost per unit
Break Even Units = FIxed Expenses / Contribution Margin per unit
Margin of safety in units = Actual sales units - Break even sales units

5. Jen & Berry
Break even units = $50000/1.30 = 38462
Margin of Safety Units = 100000-38462 = 61538 units

Un-Friendly
Break even units = $75000/1.55 = 48388
Margin of Safety Units = 100000-48388 = 51612 units

6.

	Option 1		Option 2
		Per unit		Per unit
Sales Revenue	$      6,30,000	$           3.15	$     6,60,000	$               3.30
Variable Costs	$      4,00,000	$           2.00	$     4,00,000	$               2.00
Contribution Margin	$      2,30,000	$           1.15	$     2,60,000	$               1.30
Fixed Costs	$         50,000		$        70,000
Operating Income	$      1,80,000		$     1,90,000

Jen & Berry should choose Option 2, since it provides higher operating income

7.

	Option 1		Option 2
		Per unit		Per unit
Sales Revenue	$      4,80,000	$           2.40	$     5,10,000	$               2.55
Variable Costs	$      2,00,000	$           1.00	$     2,00,000	$               1.00
Contribution Margin	$      2,80,000	$           1.40	$     3,10,000	$               1.55
Fixed Costs	$         75,000		$        95,000
Operating Income	$      2,05,000		$     2,15,000

Un-Friendly should choose Option 2, since it provides higher operating income