Yummy Juices is a juice shop located in downtown Miami. The owner is considering

Question

Yummy Juices is a juice shop located in downtown Miami. The owner is considering the purchase of a new juicer to preserve her customer base in the market. The shop is experiencing increased difficulty in competing with juice chains such as Jumba Juice that offer customers a wider variety of specialty juices and mixes. The shop is open weekdays only. The cost of the new machine is $50,000. The selling price of the new juice mixes will be $2.00 per cup, and the variable cost per cup is $.50.



Required:

1. What is the number of juices per day that must be sold to achieve break even?

2. Upon further investigation, the owner learns that the new machine requires substantial maintenance, which will increase the variable cost by $.50 per juice. How would this information affect your answer?

3. What other factors should the owner consider before making the final decision to purchase the machine?

Explanation / Answer

The selling price of the new juice mixes   $2.00 per cup The Variable cost per cup=      $0.50 Unit Contribution margin =2.00-0.50=$1.50 Contribution Margin Ratio= Unit Contribution Margin/Unit Selling Price CM Ratio=$1.50/2.00=0.75=75% Dollar sales to break even= Fixed Expenses/CM Ratio Sales to break-even= 50,000/0.75=$66,667 Unit Sales to break-even= Fixed Expenses/Unit CM Unit sales to break-even=50,000/1.50=33,333 2.The new machine requires substantial maintenance, which will increase the variable colst by $0.50 per juice the variable cost by $0.50 per juice That the new variable cost =0.50 +0.50=$1.00 Selling price remains constant $2.00 New Contribution Margin=$2.00-1.00 =$1.00 Contribution Margin Ratio= Unit Contribution Margin/Unit Selling Price CM Ratio=$1.00/2.00=0.5 =50% Unit Sales to new break-even=Fixed expenses/Unit CM Unit Sales to new break-even=50,000/1.00=50,000 The change in per unit variable cost results in a change in both the per unit contribution margin and the CM ratio.Hence, the unit sales to break even increases. per unit contribution margin and the CM ratio. Hence,the unit sales to break even increases. 3.The owner must consider before making the final decision to purchase the machine,that its CM ratio is higher, and its profits will therefore increase more rapidly as sales increase machine ,that its CM ratio is higher and its profits will therefore increase more rapidly as sales increase.

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