Question

The following information for 2019 for Penny’s Cream Puffs is available:

       Baking capacity                                  30,000 boxes of cream puffs

       Boxes sold in year                                      18,000

       Sales                                                       $270,000

       Variable costs                                          117,000

       Contribution margin                               $153,000

       Fixed costs

              Manufacturing                                    30,000

              Selling                                                37,500

              Administration                                    15,000

       Income before taxes                                 $70,500

       Income taxes @ 20%                                 14,100

       Net income                                             $ 56,400

Instructions: Consider each of the following scenarios independently:

a.    Calculate the break-even volume in boxes for the year.

b.     If Penny expects to sell 21,000 boxes of cream puffs next year, calculate the expected after tax income, assuming costs and prices remain the same.

c. How many boxes of cream puffs must Penny sell to make an after tax net income of $104,000? (Round your answer to an even number)

d.    Penny’s cousin says she can sell cream puffs to a coffee shop in a nearby city but will require Penny to pay $20,000 to advertise the product. In addition, Penny will have to pay his cousin $3 for each box sold. Calculate the number of boxes that will have to be sold to maintain her after tax net income of $56,400. (Round your answer to an even number)

e.    Penny wants to ramp up production by investing in a new machine that will cost $16,500. The benefit will be that variable costs will decrease by $2.5 per box. Calculate the new break even if the new machine is purchased.

f Assume instead that Penny does not purchase the machine or begin selling in the new city. She is worried that per box selling prices will decline by 10% and variable costs will increase by $4 per box. Calculate the sales volume in dollars needed if Penny is to maintain her after tax income of $56,400.

Answer 1

PART 1

CALCULATION OF BREAK EVEN

FORMULA = TOTAL FIXED COST / CONTRIBUTION PER UNIT

BREAK EVEN SALES = $82500 / $8.5 PER UNIT

=9706 UNITS

WORKING NOTE

1. CALCULATION OF FIXED COST =

MANUFACTURING COST 30000

SELLIG COST 37500

ADMINISTRATION COST 15000

TOTAL FIXED COST 82500

2. CALCULATION OF CONTRIBUTION PER UNIT

= CONTRIBUTION / NO.OF UNITS PRODUCED

=$153000 / 18000 UNITS

=$8.5 PER UNIT

PART 2

CALCULATION OF NET PROFIT

PARTICULARS AMOUNT

SALES PRICE ($270000 / 18000) $15

LESS VARIABLE COST ($117000/18000) $6.5

CONTRIBUTION PER UNIT (A) $8.5

NO. OF UNITS (B) 21000 UNITS

CONTRIBUTION MARGIN $178500

LESS: FIXED COST

MANUFACTURING COST 30000

SELLIG COST 37500

ADMINISTRATION COST 15000

INCOME BEFORE TAXES $96000

LESS INCOME TAX @20% $19200

INCOME AFTER TAX $76800

PART 3

PARTICULARS AMOUNT

DESIRED PROFIT AFTER TAX $104000

ADD: TAX @20% OF EBT $ 26000

EARNING BEFORE TAX(104000 / 80X100) $130000  

ADD:FIXED COST $82500

CONTRIBUTION REQUIRED $212500

COTRIBUTION PER UNIT (WORKING NOTE ) $8.5   

NO.OF UNITS TO BE PRODUCED TO GET DESIRED PROFIT OF $104000= CONTRIBUTION MARGIN / CONTRIBUTION PER UNIT

= $212500 / $8.5   

=25000 UNITS HAVE TO BE PRODUCED

WORKING NOTE

SALES PRICE ($270000 / 18000) $15

LESS VARIABLE COST ($117000/18000) $6.5

CONTRIBUTION PER UNIT (A) $8.5

PART 4

PARTICULARS AMOUNT

DESIRED PROFIT AFTER TAX $56400

ADD: TAX @20% OF EBT $ 14100

EARNING BEFORE TAX(104000 / 80X100) $70500

ADD:FIXED COST

MANUFACTURING COST 30000

SELLIG COST 37500

ADMINISTRATION COST 15000

ADVERTISEMENT COST 20000

CONTRIBUTION REQUIRED $173000

COTRIBUTION PER UNIT (WORKING NOTE ) $5.5   

NO.OF UNITS TO BE PRODUCED TO GET DESIRED PROFIT OF $56400= CONTRIBUTION MARGIN / CONTRIBUTION PER UNIT

= $173000 / $5.5

=31455 UNITS HAVE TO BE PRODUCED

WORKING NOTE

SALES PRICE ($270000 / 18000) $15

LESS VARIABLE COST ($117000/18000) $6.5

LESS COMMISION $3

CONTRIBUTION PER UNIT    $5.5