Question

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:

1. Compute the company’s monthly break-even point in units and margin of safety.
2. 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?
3. Should the company install the new machine if sales remain at the current level? Explain.

Answer 1

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.