Question

THE SCENARIO: 31 Scoops Ice Cream a new concept in gourmet ice cream is finishing up its business plan for upcoming Venture Capital rounds and just needs to complete its break-even analysis to be done. In order to get started with its ice cream business, it will need to purchase some state-of-the-art ice-cream manufacturing equipment valued at $50,000, which they will be able to purchase at a 30% discount. In addition, they will need to rent several store locations for a total of $15,000 per month. Other fixed costs include monthly salaries of $6,000 for 3 scoopers and other miscellaneous expenses of $2,000 per month. For you accounting “experts” out there, for the purposes of these exercises, you may ignore the impact/effect of depreciation.31 Scoops estimate Variable Unit Costs to be about $1. They would also like to remain price competitive and charge $3.50 per serving of ice cream.

Part I. What is the break-even point if the time horizon is changed to two years?

Part II. 31 Scoops has now found a special type of cream that they want to use in their product, which will change their cost per serving of ice cream by 10 cents. They wish to offset this by increasing the price by 10 cents as well. Now, what is the break-even point if the time horizon is two years?

Part III. Now assume that you have to take into account the scooping ability of your employees. Let’s assume that one scooper can scoop up 35,000 servings of ice cream per year (that’s a LOT of scooping). Look at your Break-Even Point in Question 1, do you have enough people to scoop up this many servings? You only want to pay for just enough scoopers that you will need. If you don’t have the right amount of servers (too few or too many) adjust your fixed costs to account for the new number of scoopers (one scooper costs $2,000 in monthly salaries) and tell me what is your new Break-Even Point. Is this new BEP supported by the number of scoopers you selected?

Answer 1

Calculation of Fixed Cost	Per Month ($)
Rent several store locations	15000
Monthly salaries ( 3 scoopers)	6000
Other Misc Exp.	2000
Total Fixed Cost (per month)	23000
Time Horizons 2 Years	24 Month
Total Fixed Cost (for 24 month)	552000
Calculation of Contribution per unit	Amount ($)
Selling Price per unit	3.5
Less: Variable Cost	1
Contribution per unit	2.5
Part I. The break-even point if the time horizon is changed to two years is as follows:
$ 552000 / 2.5 = 220800 unit (ice-cream)
Part II. break-even point if the time horizon is two years in changes senario
Calculation of Contribution per unit	Amount ($)
Selling Price per unit	3.6
Less: Variable Cost	1.1
Contribution per unit	2.5
Total Fixed Cost (for 24 month)	60
Break even point	$ 552000 / 2.5 = 220800 unit (ice-cream)
Part III.
One Scooper scooping ability (per year)	35000 ice-cream
Total Scooper in the stores	3
Total ice-cream scooped per year	35000 * 3 = 105000 ice-cream
Total ice-cream scooped in 2 year	105000 * 2 = 210000 ice-cream
Short-fall in scooping ice-cream	220800 - 210000 = 10800 ice-cream