Question

Cost-Volume-Profit

Jen & Berry’s sold 100,000 pints of ice cream last month according to the following contribution format income statement:

              Total $              Per Unit $

SALES                    $325,000               $3.25

VARIABLE COSTS              200,000                  2.00

CONTRIBUTION MARGIN       $ 125,000               $ 1.25

FIXED COSTS               50,000

NET INCOME               $ 75,000

A competing company, Un-Friendly’s, also sold 100,000 pints of ice cream last month according to the following contribution format income statement:

          Total $              Per Unit $

SALES                    $250,000               $2.50

VARIABLE COSTS              100,000               1.00

CONTRIBUTION MARGIN       $ 150,000               $ 1.50

FIXED COSTS               75,000

NET INCOME               $ 75,000

Both companies sold the same amount of ice cream and had the same Net Income but have different price and cost structures. Jen & Berry’s uses higher quality ingredients (variable cost) and charges a higher price than its competitor. Un-Friendly’s spends more on advertising (fixed cost) and sells at a lower price than Jen & Berry’s.

Analysis of Ice Cream Companies

5. Using last month’s income statements on page 2, calculate the safety margin in units (pints of ice cream) for each company.

6. Jen & Berry’s is considering two options to increase sales next month (and hopefully profit):

Option #1:

Double the pints sold next month by decreasing the price by 25 cents to $3.00.

Option #2:

Double the pints sold next month by spending an additional $30,000 next month

(fixed cost) on advertising. Price of ice cream remains at $3.25 per pint.

Which option should Jen & Berry’s choose?? Explain your answer by showing calculations for both options.

7. Un-Friendly’s is considering the same two options to increase sales next month (and hopefully profit):

Option #1:

Double the pints sold next month by decreasing the price by 25 cents to $2.25.

Option #2:

Double the pints sold next month by spending an additional $30,000 next month

(fixed cost) on advertising. Price of ice cream remains at $2.50 per pint.

Which option should Un-Friendly’s choose?? Explain your answer by showing calculations for both options.

Answer 1

5. Computation of Margin of Safety for Both Company
	Jen & Berry		Unfriendly's
	Rate/ Unit	Amount	Rate/ Unit	Amount
Production & Sales unit	100000		100000
Sales (a)	$3.25	$325,000.00	$2.50	$250,000.00
Variable Cost (b)	$2.00	$200,000.00	$1.00	$100,000.00
Contribution Margin (c=a-b)	$1.25	$125,000.00	$1.50	$150,000.00
Fixed Cost (d)		$50,000.00		$75,000.00
Profit (c-d)		$75,000.00		$75,000.00
Margin of Safety ( in Unit) Profit /Contribution Per Unit	$75000/$1.25)	60000 Unit	$75000/$1.50	50000 Unit
6. Comparison for 2 Option for ice cream sale by Jen & Berry Original Option -1 ( Double Sales / Reduce Sales Price by 0.25 Cent Option -2 ( Double Sales by increase fixed cost Rate/ Unit Amount Rate/ Unit Amount Rate/ Unit Amount Production & Sales unit 100000 200000 200000 Sales (a) $3.25 $325,000.00 $3.00 $600,000.00 $3.25 $650,000.00 Variable Cost (b) $2.00 $200,000.00 $2.00 $400,000.00 $2.00 $400,000.00 Contribution Margin (c=a-b) $1.25 $125,000.00 $1.00 $200,000.00 $1.25 $250,000.00 Fixed Cost (d) $50,000.00 $50,000.00 $80,000.00 Profit (c-d) $75,000.00 $150,000.00 $170,000.00 Option-2 : Double sales by increasing additional Fixed cost to be choosed by Jen & Berry to earn extra income $20000 as compare with Option-1 7. Comparison for 2 Option for ice cream sale by Un-friendly's Original Option -1 ( Double Sales / Reduce Sales Price by 0.25 Cent Option -2 ( Double Sales by increase fixed cost Rate/ Unit Amount Rate/ Unit Amount Rate/ Unit Amount Production & Sales unit 100000 200000 200000 Sales (a) $2.50 $250,000.00 $2.25 $450,000.00 $2.50 $500,000.00 Variable Cost (b) $1.00 $100,000.00 $1.00 $200,000.00 $1.00 $200,000.00 Contribution Margin (c=a-b) $1.50 $150,000.00 $1.25 $250,000.00 $1.50 $300,000.00 Fixed Cost (d) $75,000.00 $75,000.00 $105,000.00 Profit (c-d) $75,000.00 $175,000.00 $195,000.00 Option-2 : Double sales by increasing additional Fixed cost of $30000 to be choosed by Unfriendly's to earn extra income $20000 as compare with Option-1