Question

Cesar's Bottlers bottles soft drinks in a factory that can operate one shift, two shifts, or three shifts per day. Each shift is eight hours long. The factory is closed on weekends. The sales price of $3 per case bottled and the variable cost of $1.90 per case remain constant regardless of volume. Cesar's Bottlers can increase volume by opening and staffing additional shifts. The company has the following three choices.

	Daily Volume Range (Number of Cases Bottled)	Total Fixed Costs per Day
1 Shift	0–2,000	$	1,960
2 Shifts	2,001–3,600		3,720
3 Shifts	3,601–5,000		5,250

Required:

a. Calculate the break-even point(s).

b-1. Calculate the profit (or loss) for each alternative, assuming Cesar’s Bottlers can sell all the units it can produce.

b-2. Should Cesar's Bottlers operate at one, two, or three shifts?

Answer 1

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Ans:

a. Calculation of break-even point (BEP):

Formula for BEP = Fixed Cost / Contribution per unit

Where,

Fixed cost = given for different shifts

Contribution per unit (Sales - Variable cost) = $3.00 - $1.90 = $1.10

• 1 Shift:  BEP = $1,960 / $1.10 = 1,782 units
• 2 Shift:  BEP = $3,720 / $1.10 = 3,382 units
• 3 Shift: BEP = $5,250 / $1.10 = 4,773 units

b-1. Calculation of profit (or loss) for each alternative:

• 1 Shift: Profit = (2,000 x ($3 - $1.9)) - $1,960 = $240
• 2 Shift:  Profit = (3,600 x ($3 - $1.9)) - $3,720 = $240
• 3 Shift:  Profit = (5,000 x ($3 - $1.9)) - $5,250 = $250

b-2. Cesar's Bottlers should operate at three shift, as the profit is higher under the shift.

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