Question

vfridge manufactures mini-refrigerators. It currently produces one model the Beer Bud, and it is priced at $610. Manufacturing cost are $ 220 per unit and variable shipping costs are $ 60 per unit. Fixed Costs are $ 2574000. In 2016 it sold 9,800 units of the Beer Bud.

One of Vfridge's customers Grover Corp has asked if Vfridge could manufacture a new style of refrigerator, the Wine Pal, for 2017. Grover will pay $350 for the Wine Pal. The variable costs to produce the new fridge are estimated to be $ 175 per unit and Grover will pay for shipping. Vfridge expects to sell 10,000 units of Beer Bud and 4,000 units of Wine Pal.

The president of Vfridge checked the impact of accepting the Grover order on the breakeven sales revenuefor 2017 and was surprised to find that he dollar sales revenues require to break even using the sales mix for 2017 appeared to increase. He was not sure that his numbers were correct, but if they were, he felt incluined to reject the Drover order. He has asked for your advice.

a)Calculate the 2016 break even in dollars

b)Calculate the 2017 break even in dollars at the expected sales mix

c)Would you advise the president to accept or reject the Grover order (calc impact to income)?

Answer 1

1-	selling price		610
	less variable cost		280
	contribution margin		330
	contribution margin ratio	330/610	0.540984
	Fixed cost		2574000
	Break even sales in dollars	fixed cost/contribution margin ratio	4758000
2-	sales of Beer bud	(610*10000)	6100000
	sales of Wine pal	(4000*350)	1400000
	total sales		7500000
	less variable cost	(10000*280)+(4000*175)	3500000
	contribution margin		4000000
	contribution margin ratio = contribution/sales	4000000/7500000	0.533333
	Break even sales in dollars	fixed cost/contribution margin ratio	2574000/.5333	4826552
			Present	Future
3-	sales	610*9800	5978000	7500000
	less variable cost	280*9800	2744000	3500000
	contribution margin		3234000	4000000
	less fixed cost		2574000	2574000
	operating income		660000	1426000
	increase in income	766000
	He should accept the offer as it results in increase in operating income