Question

Steve’s Dogs produces two types of hotdogs, chili dogs and cheese dogs, with the following characteristics:
Chili Cheese
Selling Price per Unit $6 $5
Variable Cost per Unit $2 $3
Expected Sales (units) 300,000 100,000



The total fixed costs for the company are $100,000.

Required:

a. What is the anticipated level of profits for the expected sales volumes?

b. Assuming that the product mix would be 75 percent chili and 25 percent cheese at the break-even point, compute the break-even volumes.

c. If the product mix were to change to four chili dogs for each cheese dog, what would be the new break-even volumes?

Answer 1

a.

	Steve's Dogs	Chili dogs	Cheese dogs
Sales	$2,300,000	$1,800,000 (300,000*$6)	$500,000 (100,000*$5)
Variable costs	$900,000	$600,000 (300,000*$2)	$300,000 (100,000*$3)
Contribution margin	$1,400,000	$1,200,000	$200,000
Fixed costs	$100,000
Profit	$1,300,000

b.

Weighted averge contribution margin per unit = (Chilli break contribution margin per unit * Sales mix) + (Cheese contribution margin per unit * Sales mix)

= [($6-$2) * 0.75] + [($5-$3) * 0.25]

= $3 + $0.5

= $3.5

Break-even units = Fixed costs / Weighted averge contribution margin per unit

= $100,000 / $3.5

= 28,571

Chilli = 28,571 * 0.75 = 21,428

Cheese = 28,571 * 0.25 = 7,143

c.

Weighted averge contribution margin per unit = (Chilli break contribution margin per unit * Sales mix) + (Cheese contribution margin per unit * Sales mix)

= [($6-$2) * 0.8] + [($5-$3) * 0.2]

= $3.2 + $0.4

= $3.6

Break-even units = Fixed costs / Weighted averge contribution margin per unit

= $100,000 / $3.6

= 27,778

Chilli = 27,778 * 0.8 = 22,222

Cheese = 27,778 * 0.2 = 5,556