Question

Jordan and Taylor are beginning to understand break-even analysis.

Selling price to Yumminess at $10 per tin. The cost is $8 per tin, which includes $6 of direct material and $1.50 of direct labor. Annual manufacturing overhead is estimated at $100,000 for the expected sales of 200,000 tins. Operating expenses are projected to be $80,000 annually.

After looking over the costs for manufacturing overhead and operating expenses, you approximate that 85% of manufacturing overhead and 20% of operating expenses are variable costs.

They are now discussing options with adjustments to costs and sales. As long as they keep bringing brownies, you keep turning out numbers.

1. Jordan and Taylor are considering an advertising campaign for $40,000 annually. They expect this to increase sales by 5%. What would be the new net income? (5 points)

2. Yumminess wants to feature Chocolate Attack Brownies as a monthly special. The predicted sales volume is 50,000 tins. Yumminess wants Jordan and Taylor to cut their selling pricing by 10%, citing that the volume will more than make up the difference. What will be the break-even point in tins during this sale? (5 points)

3. Yumminess wants to feature Chocolate Attack Brownies as a monthly special. The predicted sales volume is 50,000 tins. Yumminess wants Jordan and Taylor to cut their selling pricing by 10%, citing that the volume will more than make up the difference. What net income can Jordan and Taylor expect during this offer? (5 points)

Answer 1

Answer to Part 1.

Selling Price per Unit= $10
Predicted Sales = 200,000 * 1.05 = 210,000 Units

Variable Cost = Direct materials + Direct Labor + Variable manufacturing Overhead + Variable Operating Expense
Variable manufacturing Overhead = $100,000 * 85% = $85,000
Variable manufacturing Overhead per Unit = 85,000 / 200,000 = $0.425

Variable Operating Expense = $80,000 * 20% = $16,000
Variable Operating Expense per unit = 16,000 / 200,000 = $0.08

Variable Cost = $6.00 + $1.50 + $0.425 + $0.08
Variable Cost = $8.005

Contribution margin per unit = $10.00 - $8.005
Contribution margin per unit = $1.995

Fixed Manufacturing Overhead = $100,000 * 15% = $15,000
Fixed Operating Expense = $80,000 * 80% = $64,000

Predicted Fixed Cost = $15,000 + $64,000 + $40,000 = $119,000

Net Income = Contribution Margin – Fixed Cost
New Net Income = (210,000 * $1.995) - $119,000
New Net Income = $418,950 - $119,000
New Net Income = $229,950

Answer to Part 2.

Predicted Selling Price = $10 – ($10 * 10%) = $9

Fixed Cost = $15,000 + $64,000 = $79,000

Predicted Contribution Margin per Unit = $9.00 - $8.005
Predicted Contribution Margin per Unit = $0.995

New Break Even Point (in Units) = Fixed Cost / Predicted Contribution Margin per Unit
New Break Even Point (in Units) = 79,000 / 0.995
New Break Even Point (in Units) = 79,396.98 or 79,397 Units

Answer to Part 3.

Predicted Selling Price = $10 – ($10 * 10%) = $9
Predicted Unit Sales = 200,000 + 50,000 = 250,000

Fixed Cost = $15,000 + $64,000 = $79,000

Predicted Contribution Margin per Unit = $9.00 - $8.005
Predicted Contribution Margin per Unit = $0.995

Net Income = Contribution Margin – Fixed Cost
New Net Income = (250,000 * $0.995) - $79,000
New Net Income = $248,750 - $79,000
New Net Income = $169,950