Question

EcoFlame Candles, a small manufacturer of organic, sustainably sourced and produced candles, is weighing some promotional options for the month of March. The candles cost $3 each to manufacture and overhead is $12,000 per month. The candles are sold to EcoFlame’s distributor for $4.25 each.

a. What is the March breakeven amount for the candle line itself?

b. One promotional option is to advertise in Candle Monthly, a publication aimed at the candle industry. The advertising costs for March would be $850. What is EcoFlame’s new March breakeven amount?

c. A second option would be a promotional discount to wholesalers of two and a half percent off the price of each candle purchased during March. What would EcoGreen’s breakeven amount for March be under this scenario?

d. Assuming that EcoFlame expects the same sales increase from each option, which one should it select and why?

Answer 1

a) Break even point (in unit) = fixed cost/Contribution per unit

Contribution per unit = selling price per unit - variable cost per unit

=$4.25 - $3

=$1.25

Fixed cost = 12000$

Thus Break even point (in unit) = 12000/1.25

=9600 units

Break even point (in amount) = Break even point (in unit) x selling price per unit

=9600 x 4.25

=40800$

b) New Break even point (in unit) = fixed cost+ advertising cost/Contribution per unit

=12000+850 / 1.25

=12850/1.25

=10280 units

Break even point (in amount) = Break even point (in unit) x selling price per unit

=10280 x 4.25

=43690$

c) Here selling price = 4.25(1- discount rate)

=4.25(1-2.5%)

=4.25(1-0.025)

=4.25(0.975)

=4.1438 $

Thus Contribution per unit = $4.1438 - $3

=1.1438$

Break even point (in unit) = fixed cost/Contribution per unit

Thus Break even point (in unit) = 12000/1.1438

=10491.34 units

i.e 10492 units

Break even point (in amount) = Break even point (in unit) x selling price per unit

=10492 x 4.1438

=43476.75 $

d) If sales is to increse by same level , then  second option would be preferable as break even amount is less than that of first option