Question
In: Accounting
Benny Ltd sells bubble tea for $0.40 per packet to retailers. The following revenues and costs...
Benny Ltd sells bubble tea for $0.40 per packet to retailers. The following revenues and costs for one month.
Sales $ 180,000
Less; Variable manufacturing Costs $117,000
Fixed manufacturing overheads 25,000
Variable selling and administrative 9,000
Fixed selling and administrative 11,000 162,000
Net Profit $18,000
Required:
- Compute the company’s monthly break-even point in units and margin of safety.
- The company is discussing the installation of a new machine to pack the drinks. The new machine would slash variable manufacturing costs per packet by $0.04, but it would cause fixed manufacturing costs to double in amount per month. If the new machine is installed, how many units would the company have to sell to maintain its current profits of $18,000?
- Should the company install the new machine if sales remain at the current level? Explain.
Solutions
Expert Solution
| Part a | Total | Per Unit | ||
| Sales(450,000 packets) | $ 1,80,000 | $ 0.40 | ||
| Variable manufacturing costs | $ 1,17,000 | $ 0.26 | ||
| Variable selling and administrative | $ 9,000 | $ 0.02 | ||
| Contribution Margin | $ 54,000 | $ 0.12 | ||
| Fixed manufacturing costs | $ 25,000 | |||
| Fixed selling and administrative | $ 11,000 | |||
| Net Operating Income | $ 18,000 | |||
| Contribution Margin Ratio($54,000/$180,000) | 30% | |||
| Break-even Point($36,000/$0.12) | 300000 | packets | ||
| Margin of safety in units(450,000-300,000) | 150000 | packets | ||
| Part b | Target Net Profit | $ 18,000 | ||
| Add:Fixed Costs($50,000+$11,000) | $ 61,000 | |||
| Target Contribution Margin | $ 79,000 | |||
| Revised Contribution margin per unit($0.40-$0.24) | $ 0.16 | |||
| No. of units required to sell($79,000/$0.16) | 493750 | packets | ||
| Part c | Total | Per Unit | ||
| Sales(450,000 packets) | $ 1,80,000 | $ 0.40 | ||
| Variable manufacturing costs | $ 99,000 | $ 0.22 | ||
| Variable selling and administrative | $ 9,000 | $ 0.02 | ||
| Contribution Margin | $ 72,000 | $ 0.16 | ||
| Fixed manufacturing costs | $ 50,000 | |||
| Fixed selling and administrative | $ 11,000 | |||
| Net Operating Income | $ 11,000 | |||
| Since the Net Operating Income is decreasing after installing the new machine, hence it is not advisable to install the machine. | ||||
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