Question

The Northwest Catering Company specializes in preparing tasty meals that are frozen and shipped to various restaurants in the Seattle Area. Currently, the company offers two different meal options. More options are planned in the future. The company prepares the meals on a daily basis and ships them via truck to customers. The delivery cost is the same regardless of the number of units shipped . The company’s bookkeeper prepared the following cost analysis:

	Product
	Smoked Salmon Pizza	Oyster and Octopus Pasta
Selling Price	$7.00	$9.00
Variable Cost	4.00	6.00
Estimated number of units sold	250,000	150,000
Sales Mix	62.5%	37.5%

               

Summary of Fixed Costs
Description	Amount
Truck Delivery Charges	125,800
Factory Rental	250,000
Depreciation on Equipment	150,000
Salaries for Factory Workers	240,000
Officer Salaries	300,000
Advertising	254,200

Required

1. Assuming that all units are sold, compute the company net income for the year.

2. Assuming that the sales mix remains constant, compute the breakeven point. Round the sales mix percentage to 4 decimal places. (ex. 10.1234)

3. The Oyster and Octopus Pasta has not been as popular as expected. However, the smoked salmon pizza has been a hit. During the current period, the company sold 99,000 Oyster and Octopus Pasta Meals and 297,000 Smoked Salmon Meals. Compute the net income based upon the actual unit sales.

4. These sales mix percentage relationships are expected to continue throughout the upcoming year. Based on the original information, compute the expected income for the upcoming year assuming the following changes will occur:

Total Fixed Costs will decrease by 5%

The variable cost per unit for each product will increase by 25%

The selling price per unit will increase by 20%

Total Unit Sales will increase by 5%

Answer 1

Solution

Northwest Catering Company

1. Computation of net income:

	Computation of net income
	Smoked Salmon Pizza	Oyster and Octopus Pasta
Sales	$1,750,000	$1,350,000	$3,100,000
Variable cost	$1,000,000	$900,000	$1,900,000
Contribution margin	$750,000	$450,000	$1,200,000
Fixed costs -
Truck delivery charge			$125,800
factory rental			$250,000
Depreciation on equipment			$150,000
Salaries for factory workers			$240,000
Office salaries			$300,000
Total fixed costs			$1,065,800
Net income			$134,200

1. Computation of break-even point:

Break-even point in unit sales = fixed costs/contribution margin per unit

Contribution margin per unit for multi-product company= weighted average contribution margin

	Smoked Salmon Pizza	Oyster and Octopus Pasta
Sales price per unit	$7	$9
Variable cost per unit	$4	$6
Contribution margin per unit	$3	$3

Weighted average contribution margin = = [(unit CM of Smoked Salmon Pizza x sales proportion) + (unit CM of Oyster Octopus Pizza x sales proportion)]

Sales proportion = Smoked salmon pizza : oyster pizza = 62.5% : 37.5%

Weighted average contribution margin = [3 x62.5%) + (3 x 37.5%)] = $3 per unit

Total fixed cost = $1,065,800

Break-even point in unit sales = $1,065,800/3 =355,267 units (rounded to nearest whole number)

Proportion of Smoked Salmon Pizza in break-even sales units = 355,267 x 62.5% = 222,042 (rounded to nearest whole number)

Proportion of Oyster and Octopus Pizza in break-even sales units = 355,267 x 37.5% = 133,225

1. Net Income based on actual sales – Smoked Salmon 297,000 meals; Oyster Octopus 99,000 Meals:

	Computation of net income
	Smoked Salmon Pizza	Oyster and Octopus Pasta
Sales	$2,079,000	$891,000	$2,970,000
Variable cost	$1,188,000	$594,000	$1,782,000
Contribution margin	$891,000	$297,000	$1,188,000
Fixed costs -
Truck delivery charge			$125,800
factory rental			$250,000
Depreciation on equipment			$150,000
Salaries for factory workers			$240,000
Office salaries			$300,000
Total fixed costs			$1,065,800
Net income			$122,200

Note: the respective sales price per unit of Smoked Salmon and Oyster Octopus is $7 and $9.

The respective variable cost per unit of Smoked Salmon and Oyster Octopus is $4 and $6.

The fixed costs would remain constant all any level of sales volume and hence no change in fixed costs.

1. Computation of expected net income for the following situations –

Total fixed cost will decrease by 5%

Original fixed cost = $1,065,800

Revised (decreased by 5%) = 1,065,800 -8% of 1,065,800 = $1,012,510

	Computation of net income
	Smoked Salmon Pizza	Oyster and Octopus Pasta
Sales	$1,750,000	$1,350,000	$3,100,000
Variable cost	$1,000,000	$900,000	$1,900,000
Contribution margin	$750,000	$450,000	$1,200,000
Fixed costs			$1,012,510
Net Income			$187,490

The net income increased by $53,290 when fixed cost decreased by 5%

• The variable cost per each product increased by 25%

Revised variable costs of each product are,

Smoked salmon - $4 + 25% of 4 =$5

Oyster Octopus - $6 + 25% of 6 = $7.50

	Computation of net income
	Smoked Salmon Pizza	Oyster and Octopus Pasta
Sales	$1,750,000	$1,350,000	$3,100,000
Variable cost	$1,250,000	$1,125,000	$2,375,000
Contribution margin	$500,000	$225,000	$725,000
Fixed costs			$1,065,800
Net Income			($340,800)

The company reported a loss of $340,800 when the variable price increased by 25%.

• The selling price per unit increased by 20%

Revised selling prices of each product are,

Smoked salmon - $7 + 20% of 7 =$8.40

Oyster Octopus - $9 + 20% of 9 = $10.80

	Computation of net income
	Smoked Salmon Pizza	Oyster and Octopus Pasta
Sales	$2,100,000	$1,620,000	$3,720,000
Variable cost	$1,000,000	$900,000	$1,900,000
Contribution margin	$1,100,000	$720,000	$1,820,000
Fixed costs			$1,065,800
Net Income			$754,200

The net income increased by $$620,000 when sales prices of two products increased by 20%.

• Total unit sales increase by 5%

Total Increased sales = (250,000 + 150,000) + 5% of (250,000 + 150,000) = 420,000 units

Proportion of smoked salmon = 420,000 x 62.5% = 262,500 units

Proportion of oyster octopus = 420,000 x 37.5% = 157,500 units

	Computation of net income
	Smoked Salmon Pizza	Oyster and Octopus Pasta
Sales	$1,837,500	$1,417,500	$3,255,000
Variable cost	$1,000,000	$900,000	$1,900,000
Contribution margin	$837,500	$517,500	$1,355,000
Fixed costs			$1,065,800
Net Income			$289,200

The net income increased by $155,000 when sales in total units increased by 5%.