Question

Karges Coffee Inc. manufactures a line of single-cup brewing machines for home and office use that brew a cup of coffee, tea, or hot chocolate in less than a minute. The machines use specially packaged portions of coffee, tea, or hot chocolate that can be purchased online directly from Karges or at specialty coffee shops licensed to distribute the company's products. The appeal of the brewing machines is twofold. First, they offer a high level of convenience. The use of prepackaged coffee servings means no grinding of coffee beans and no mess. Also, the brewing machines have a water reservoir that for some models is large enough to make up to 20 cups of coffee. Second, the taste of each cup of coffee, tea, or hot chocolate is very consistent. The brewers’ pressurized system uses the same amount of water for each cup, and the airtight seal used in the individual portions keeps the product fresh.

The company has three models of brewers that offer different features, such as the size of the water reservoir, the number of brewing sizes, and the types of filtering devices used in the machine. Data from the most recent fiscal year for the three models are shown below:

	Model
	Home Brewer	Office Basic	Office Deluxe
Sales Volume (units)	12,000	30,000	6,000
Unit selling price	$150	$200	$300
Variable cost per unit	$120	$140	$180
Contribution margin per unit	$30	$60	$120

Fixed costs are $1,500,000 per year. The company has no work in process or finished goods inventories. The company is facing increased levels of competition from manufacturers using similar brewing technologies and believes there is no room for any increases in unit selling prices.

1. What impact would be doubling the number of Office Basic units sold next year have on the overall break-even point in sales dollars? Assume that there will be no changes to the Home Brewer or Office Deluxe unit sales, that unit selling prices and variable costs will remain the same for each model, and that total fixed costs will be unchanged

Answer 1

	Home Brewer	Office Basic	Office Deluxe	Total
Sales Volume (units)	12,000	30,000	6,000
Unit selling price	$150	$200	$300
Variable cost per unit	$120	$140	$180
Contribution margin per unit	$30	$60	$120
Total Contribution Margin	$360,000	$1,800,000	$720,000	$2,880,000
Total Sales	$1,800,000	$6,000,000	$1,800,000	$9,600,000
Weighted average CM Ratio				30.00%
Break even Sales Dollars = Fixed costs/Weighted average CM Ratio
=1,500,000/30%
i.e. $	5,000,000
When Office basic is doubled
	Home Brewer	Office Basic	Office Deluxe	Total
Sales Volume (units)	12,000	60,000	6,000
Unit selling price	$150	$200	$300
Variable cost per unit	$120	$140	$180
Contribution margin per unit	$30	$60	$120
Total Contribution Margin	$360,000	$3,600,000	$720,000	$4,680,000
Total Sales	$1,800,000	$12,000,000	$1,800,000	$15,600,000
Weighted average CM Ratio				30.00%
Break even Sales Dollars = Fixed costs/Weighted average CM Ratio
=1,500,000/30%
i.e. $	5,000,000
Hence, no change in overall break even point in Sales Dollars