Question

7. Boston’s Dairy has just opened its main yogurt factory in upstate Massachusetts. This main factory can produce 3,500 boxes of yogurt monthly (each box contains twelve 6-oz cups). Due to overwhelming demand for the company’s product Boston’s Dairy had signed a contract to rent a new factory, which can produce up to 8,000 boxes per month. The monthly total fixed costs are $40,000 in the main factory and $18,000 in the new factory. The variable product cost of yogurt is $4.50 per box in the main factory. The variable cost in the new factory is $6.0 per box as materials have to be redistributed from the main factory. The average selling price is $15, and the variable selling expense is $1 per box, which is the same for all factories In addition, Boston’s Dairy plans to pay its sales force $0.80 per box as added bonus for every box sold above the break-even point.

How many boxes does the company have to produce and sell in order to earn a net operating income of $10,000 per month (round all decimal up to one box).

A. 11,500 boxes B. 4,233 boxes C. 1,389 boxes D. 6,344 boxes E. 7,983 boxes

Answer 1

Revenue and costs for main factory data are given below

Fixed costs	$ 40,000
Variable costs = 3500 (4.5+1)	$ 19,250
Total costs	$ 59,250
Total revenue 3500* 15	$ 52,500
Loss ( 52,500 – 59,250)	$ 6,750

Using this data for second factory, the new factory needs $ 6,750 profit in order to break even.

$ 18,000 + 6750 + 7x = 15x

Or. X = 3094 units need to be produced at new factory in order to break even

Total units in order to break even = 3500+3094 = 6594 units

After calculation of breakeven point, the contribution margin is to be used to get how many more units need to be sold to yield profit of $ 10,000. The additional box cost of $ 0.80 per box also need to be considered.

Contribution margin = 15 – (6+1+0.8) = $ 7.20

Number of units to be sold more = 10,000/7.20 = 1389 units

Total units to be sold to yield profit of $ 10,000 = 1389+6594 = 7983 units

Hence, the correct option is E. 7983 boxes

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