Question

The following information for 2020 for Vinnie`s Cream Pie Fillings is available: Baking capacity 3,000 tonnes of filling Tonnage sold in year 1,800 Sales $900,000 Variable costs 495,000 Contribution margin $405,000 Fixed costs Manufacturing 90,000 Selling 112,500 Administration 45,000 Income before taxes $157,500 Income taxes @ 40% 63,000 Net income $ 94,500 Instructions Consider each of the following scenarios independently: a) Calculate the break-even volume in tonnes for the year. b) If Vinnie expects to sell 2,100 tonnes of filling next year, calculate the expected aftertax income, assuming costs and prices remain the same. c) Vinnie`s cousin says he can sell pie filling to a new company in a nearby city but will require Vinnie to pay $61,500 to advertise the product. In addition, Vinnie will have to pay his cousin $25 for each tonne sold. Calculate the number of tones that will have to be sold to maintain the current after-tax net income. d) Vinnie wants to ramp up production by investing in a new machine that will cost $58,500. The benefit will be that variable costs will decrease by $25 per tonne. Calculate the new break even if the new machine is purchased. e) Assume instead that Vinnie does not purchase the machine or begin selling in the new city. He is worried that per-tonne selling prices will decline by 10% and variable costs will increase by $40 per tonne. Calculate the sales volume in dollars needed if Vinnie is to maintain his after-tax income of $94,500.

Answer 1

a)

Sales in tonnes: 1800

Sales in Amount: $900,000

Sale price per ton: 900,000 / 1800 = $500

Total Variable cost: $495,000

Variable cost per ton: 495,000 / 1800 = $275

Contribution Margin per ton: $500 - $275 = $225

Fixed Cost: Manufacturing + Selling + Administration

$90,000+$112,500+$45,000 = $247,500

Break-Even Volume: Fixed Cost / Contribution margin

: 247,500 / 225 = 1100 tonnes

------------------------------------------------------------------------------------------------------------------------------------

b)

Sales in tonnes: 2100

Sales prince per ton (calculated in a): $0

Sales in Amount: 2100 * 500 = $1,050,000

Variable cost per ton (calculated in a) = $275

Total Variable cost: 2100 * 275 = $577,500

Total Fixed Cost (Calculated in a): = $247,500

(Note that total fixed cost remains same irrespective ov change in volume)

Net Profit (before tax): Total Sales - Variable Costs - Fixed Costs

: $1,050,000 - $577,500 - $247,500 = $225,000

Net Profit (After tax): Net Profit (before tax) * (1-tax rate)

$225,000 ( 1 - 0.40)

$225,000 * 0.60 = $135,000

--------------------------------------------------------------------------------------------------------------------------------------

c)

Orginal Variable cost per ton (calculated in a) = $275

New Variable Cost: Original Variable costs + $25 to be paid to cousin

: $275 + $25 = $300

New Contribution Margin per ton: Sales - Variable Costs

: $500 - $300 = $200

Original Fixed Cost (Calculated in a): = $247,500

New Fixed Costs : Original Fixed Cost + Advertisement Costs

: $247,500 + $61,500 = $309,000

Desired Pre-tax profit: $157,500

Units to be sold to earn desired profit : (Fixed Costs + Desired Profit) / Contribution Margin per ton

: ($309,000 + $157,500) / $200

   : 2,333 tonnes

-----------------------------------------------------------------------------------------------------------------------------------

d)

Orginal Variable cost per ton (calculated in a) = $275

New Variable Cost: Original Variable costs - $25 decrese

: $275 - $25 = $250

New Contribution Margin per ton: Sales - Variable Costs

: $500 - $250 = $250

Original Fixed Cost (Calculated in a): = $247,500

New Fixed Costs : Original Fixed Cost + Machine Cost

: $247,500 + $58,500 = $306,000

Break-Even Volume: Fixed Cost / Contribution margin

: $306,000 / 250 = 1224 tonnes

---------------------------------------------------------------------------------------------------------------------------------------------

e)

Sale price per ton (as per a) :   $500

Revised Sale proce: $500 - 10% = $450

Orginal Variable cost per ton (calculated in a) = $275

New Variable Cost: Original Variable costs - $40 increase

: $275 + 40 = $315

New Contribution Margin per ton: Sales - Variable Costs

: $450 - $315 = $135

Total Fixed Cost (Calculated in a): = $247,500

Desired Pre-tax profit: $157,500

Units to be sold to earn desired profit : (Fixed Costs + Desired Profit) / Contribution Margin per ton

: ($247,500 + $157,500) / $135

: 3,000 tonnes

Sales volume in dollars required to earn desired profit: 3,000 tonnes * Sale price per ton

: 3,000 * $450 = $1,350,000

------------------------------------------------------------------------------------------------------------------------------------------