Question

Izzy Ice Cream has the following price and cost information:

Price per 2-scoop sundae	$	5.00
Variable cost per sundae:
Ingredients		1.35
Direct labor		0.45
Overhead		0.20
Fixed cost per month	$	8,100

Required:

1. Determine Izzy’s break-even point in units and sales dollars.

2. Determine how many sundaes must be sold to generate a profit of $16,200.

3. Calculate Izzy’s new break-even point for each of the following independent scenarios:

a. Sales price decreases by $0.50.

b. Fixed costs decrease by $300 per month.

c. Variable costs increase by $0.50 per sundae.

4. Based on the original information, how many sundaes must Izzy sell to generate a profit of $44,000, if sales price increases by $0.50 and variable costs increase by $0.30?

Answer 1

Contribution margin = selling price - Variable cost

Breakeven sales in units = Fixed cost/ Contribution margin per unit

Breakeven sales in dollars = Fixed cost/ Contribution margin ratio

1)

Contribution margin

= 5 - 1.35 - 0.45 - 0.20

= $3.00

Contribution margin ratio = Contribution margin/ Sales

= 3/5

= 60%

Breakeven in units

= 8,100/3

= 2,700 units

Breakeven in dollars

= 8,100/60%

= $13,500

2)

Units to be sold

= ( Fixed cost + Profit to earn)/contribution margin per unit

= ( 8,100 + 16,200)/3

= 8,100 units.

3)

If sales price is decrease by $0.50 therefore contribution margin will also decrease by $0.50

Contribution margin = 3 - 0.50 = $2.50

Breakeven = 8,100/2.50

= 3,240 units.

B) Fixed cost = 8,100 + 300 = 8,400

Breakeven = 8,400/3 = 2,800 units

C)

Variable cost increases will decrease the contribution margin

Contribution margin = 3 - 0.50 = 2.50

Breakeven = 8,100/2.50

= 3,240 units.

4)

Revised sale price = 5.50

Revised variable cost = 2 + 0.30 = $2.30  

Contribution margin = $3.20

Units to be sold

= (8,100 + 44,000)/3.20

= 16,281.25 units