Question

In: Accounting

Foamy Ltd. plans to produce a coffee-based drink called Alert. It is anticipated that variable costs...

Foamy Ltd. plans to produce a coffee-based drink called Alert. It is anticipated that variable costs will amount to 40p per drink. The company will produce Alert in a processing facility with a capacity to produce 200,000 drinks a year. Fixed costs are anticipated to be £100,000 per year. The company plans to supply to retailers at a price of 95p per drink.
Required:
a. Calculate the break-even volume, at the expected price, to retailers.
b. Calculate the break-even sales price to retailers if the factory is used at full capacity.

Market research carried out by Foamy Ltd has demonstrated that for sales at a price of £1.90 per drink demand from retailers would be zero, and that demand will increase, on a straight-line basis, by 20,000 drinks for every 10p (£0.10) fall in price.
Required:
c. Calculate the sales price at which the company’s profit will be maximised, and the profit the company will make at that sales price.

Solutions

Expert Solution

a. Break Even Volume = Fixed Cost/ Contribution per unit

Contribution= Sales Price - Variable Cost = 0.95-0.40 =0.55 £ per unit

Fixed Cost = 100,000 £

Break Even Volume = 100,000 /0.55 = 181818.18 units

b. calculate the break-even sales price to retailers if the factory is used at full capacity.

Step 1- Allocation of Fixed Cost to per unit

= Fixed Cost/ Number of units planning to sell

= 100,000/2,00,000 =0.5£ per unit

Step 2- Add Variable Cost Per unit to it

Which makes it 0.5+0.4 = 0.9£

Breakeven Price= £0.9 per unit

c.

Here we have maximum capacity of producing the units =200,000 units so we will have to check the profitability for each alternative as the contribution margin will change in each case as follows-

Units Price Variable Cost Contibution per unit Total Contribution Margin Profit or Loss
20000 1.9 0.4 1.5 30000 -70000
40000 1.8 0.4 1.4 56000 -44000
60000 1.7 0.4 1.3 78000 -22000
80000 1.6 0.4 1.2 96000 -4000
100000 1.5 0.4 1.1 110000 10000
120000 1.4 0.4 1 120000 20000
140000 1.3 0.4 0.9 126000 26000
160000 1.2 0.4 0.8 128000 28000
180000 1.1 0.4 0.7 126000 26000
200000 1 0.4 0.6 120000 20000

Therefore 160000 units to be produced and sold at £1.2 per unit.

ekkarill92 answered 2 years ago
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