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

A	B	C	D	E	F	G
2
3		Selling Price	$10	per tin
4		Expected Sales Units	200000	tins
5		Costs per unit are as follows:
6
7		Direct Materials	$6.00
8		Direct Labor	$1.50
9		Manufacturing Overhead	$0.50
10		Total	$8.00	=SUM(D7:D9)
11
12		Operating Expense	$80,000
13		Total Manufacturing Overhead	$100,000
14		Variable Manufacturing Overhead	85%	of manufacturing overhead
15		Variable operating expenses	20%	of operating expenses
16
17		Fixed manufacturing overhead	$15,000.00
18		Fixed Operating Expense	$64,000.00
19		Total Fixed cost	$79,000.00	=SUM(D17:D18)
20
21		Variable Costs Per unit can be calculated as follows:
22		Direct Materials	$6.00
23		Direct Labor	$1.50
24		Manufacturing Overhead	$0.43	=D9*D14
25		Operating Expenses	$0.08	=(D12/D4)*D15
26		Total	$8.01	=SUM(D22:D25)
27
28		1)
29		Initial Sales Units	200000	tins
30		Increase in Sales	5%
31		New Sales Units	210000	tins
32
33		Net income can be calculated as follows:
34		Revenue		$2,100,000.00
35		Variable costs		$1,681,050.00
36		Contribution margin		$418,950.00
37		Fixed Costs:
38		Manufacturing Overhead	$15,000.00
39		Operating Expenses	$64,000.00
40		Advertising Cost	$40,000.00
41		Total Fixed cost		$119,000.00
42		Net Income		$299,950.00
43
44		Hence net income is	$299,950.00
45
46		2)
47
48		Initial Sales Price	$10.00	per tin
49		Decrease in Sales Price	10%
50		New Sales Price	$9.00	per tin
51
52		Calculation of contribution margin per unit:
53		Price of the product	$9.00
54		Variable cost of the product	$8.01
55		Contribution margin per unit	=Price of the product-Variable cost per unit
56			$1.00	=D53-D54
57
58		Hence contribution margin per unit	$1.00
59
60
61		Calculation of breakeven unit:
62		Fixed Cost	$79,000
63		contribution margin per unit	$1.00
64
65		Break-even Units	=Fixed Costs/Contribution margin per unit
66			79397	=D62/D63
67
68		Hence breakeven units is	79397
69
70		3)
71		Additional Sales units	50000
72		Total Sales Units	250000	=D4+D71
73
74		Net income can be calculated as follows:
75		Revenue		$2,250,000.00
76		Variable costs		$2,001,250.00
77		Contribution margin		$248,750.00
78		Fixed Costs:
79		Manufacturing Overhead	$15,000.00
80		Operating Expenses	$64,000.00
82		Total Fixed cost		$79,000.00
83		Net Income		$169,750.00
84
85		Hence net income is	$169,750.00
86

Formula sheet

A	B	C	D	E	F	G
2
3		Selling Price	10	per tin
4		Expected Sales Units	200000	tins
5		Costs per unit are as follows:
6
7		Direct Materials	6
8		Direct Labor	1.5
9		Manufacturing Overhead	=100000/200000
10		Total	=SUM(D7:D9)	=SUM(D7:D9)
11
12		Operating Expense	80000
13		Total Manufacturing Overhead	100000
14		Variable Manufacturing Overhead	0.85	of manufacturing overhead
15		Variable operating expenses	0.2	of operating expenses
16
17		Fixed manufacturing overhead	=D13*(1-D14)
18		Fixed Operating Expense	=D12*(1-D15)
19		Total Fixed cost	=SUM(D17:D18)	=SUM(D17:D18)
20
21		Variable Costs Per unit can be calculated as follows:
22		Direct Materials	=D7
23		Direct Labor	=D8
24		Manufacturing Overhead	=D9*D14	=D9*D14
25		Operating Expenses	=(D12/D4)*D15	=(D12/D4)*D15
26		Total	=SUM(D22:D25)	=SUM(D22:D25)
27
28		1)
29		Initial Sales Units	=D4	tins
30		Increase in Sales	0.05
31		New Sales Units	=D29*(1+D30)	tins
32
33		Net income can be calculated as follows:
34		Revenue		=D31*D3
35		Variable costs		=D31*D26
36		Contribution margin		=E34-E35
37		Fixed Costs:
38		Manufacturing Overhead	=D17
39		Operating Expenses	=D18
40		Advertising Cost	40000
41		Total Fixed cost		=SUM(D38:D40)
42		Net Income		=E36-E41
43
44		Hence net income is	=E42
45
46		2)
47
48		Initial Sales Price	=D3	per tin
49		Decrease in Sales Price	0.1
50		New Sales Price	=D48*(1-D49)	per tin
51
52		Calculation of contribution margin per unit:
53		Price of the product	=D50
54		Variable cost of the product	=D26
55		Contribution margin per unit	=Price of the product-Variable cost per unit
56			=D53-D54	=D53-D54
57
58		Hence contribution margin per unit	=D56
59
60
61		Calculation of breakeven unit:
62		Fixed Cost	=D19
63		contribution margin per unit	=D58
64
65		Break-even Units	=Fixed Costs/Contribution margin per unit
66			=D62/D63	=D62/D63
67
68		Hence breakeven units is	=D66
69
70		3)
71		Additional Sales units	50000
72		Total Sales Units	=D4+D71	=D4+D71
73
74		Net income can be calculated as follows:
75		Revenue		=D72*D50
76		Variable costs		=D72*D26
77		Contribution margin		=E75-E76
78		Fixed Costs:
79		Manufacturing Overhead	=D17
80		Operating Expenses	=D18
82		Total Fixed cost		=SUM(D79:D80)
83		Net Income		=E77-E81
84
85		Hence net income is	=E82
86