You are a Consultant for the professional service firm, ABC LLP. Your firm speci
ID: 2470389 • Letter: Y
Question
You are a Consultant for the professional service firm, ABC LLP. Your firm specializes in providing a wide variety of internal business solutions for different clients. A consumer business partner within the firm notices your availability at 3:00 PM on a Friday afternoon and pulls you into a meeting with one of his high profile clients.
Dark and Bold Inc. manufactures a line of single-cup brewing machines for home and office use that brew a cup of coffee, tea, or hot chocolate in less than a minute. The machines use specially packaged portions of coffee, tea, or hot chocolate that can be purchased online directly from Dark and Bold or at Second Cup coffee shops who are licensed to distribute the company’s products. The appeal of the brewing machines is twofold. First, they offer a high level of convenience. The use of prepackaged coffee servings means no grinding of coffee beans and no mess. Also, the brewing machines have a water reservoir that for some models is large enough to make up to 20 cups of coffee. Second, the taste of each cup of coffee, tea, and hot chocolate is very consistent. The brewers’ pressurized system uses the same amount of water for each cup and the airtight seal used in the individual portions keeps the product fresh.
Additional Information
The company has three models of brewers that offer different features, such as the size of the water reservoir, the number of brewing sizes, and the types of filtering devices used in the machine. Data from the most recent fiscal year for the three models is shown below.
Model
Home Brewer
Office Brewer
European Deluxe
Sales volume (units)
12,000
30,000
6,000
Unit selling price
$150
$200
$300
Variable cost per unit
$120
$140
$180
Contribution margin per unit
$30
$60
$120
Fixed costs are $1,500,000 per year. The company has no work in process or finished goods inventories. The company is facing increased levels of competition from manufacturers using similar brewing technologies and believes there is no room for any increases in unit selling prices.
Dark and Bold Inc. is unsure of the strategies to take in order to increase profitability. The engagement partner would like the following questions on his desk by Monday morning:
Required:
1. Calculate the company’s overall break-even point in sales dollars.
2. Calculate the sales dollars required for each product at the overall break-even level of sales calculated in (1) above.
3. Calculate the company’s overall break-even point in total units.
4. What impact would doubling the number of Office Brewer units sold next year have on the overall break-even point in sales dollars? Assume that there will be no changes to the Home Brewer or European Deluxe unit sales, that unit selling prices and variable costs will remain the same for each model, and that total fixed costs will be unchanged.
5. The company is considering a new advertising campaign to raise overall consumer awareness of the product offerings. The total cost of the year-long campaign would be $150,000. By how much would sales need to increase overall for the company to be able to justify the new campaign? Assume no change to the current product mix.
6. Suppose that instead of being designed to increase total sales volume, the new $150,000 advertising campaign will focus on getting customers who would have purchased the Office Brewer model to buy the European Deluxe model instead. To justify the cost of the new advertising, how many customers must purchase the European Deluxe model instead of the Office Basic model? Assume that the new advertising campaign will have no impact on sales of the Home Brewer model.
7. The company is considering adding a new product to its line of brewers targeted at the office use market (both the Office Brewer and European Deluxe are currently targeting office users). The new brewer, the Office Plus, would sell for $250 per unit and would have variable unit costs of $160. Introducing the new model would increase fixed costs by $102,000 annually and would reduce annual unit sales of the Office Brewer and European Deluxe models by 10% each. Assuming no change to the sales of the Home Brewer model, how many units of the Office Plus would need to be sold to justify its addition to the product line next year?
Model
Home Brewer
Office Brewer
European Deluxe
Sales volume (units)
12,000
30,000
6,000
Unit selling price
$150
$200
$300
Variable cost per unit
$120
$140
$180
Contribution margin per unit
$30
$60
$120
Explanation / Answer
The break-even point is when the total revenues is equal to total cost that means at this point there is no profit and loss.
To calculate break- even point in sales dollar, the formula is given below
Break even point in units = fixed cost / contribution per unit
Break even point in $ = break even units * selling price per unit
The following assumptions are made
We will allocate the fixed expenses as per sales volume of each model
To calculate total break even units per each model
Then calculate break even sales $ per model
The total of all break even units of all models will be company BEP in units
The total of all break even sales $of all models will be company BEP in $
The calculation of BEP in $ and units are given below
1) the company overall BEP in $ will be $5,234,375
2) the model wise BEP in $ are home brewer is $1,406,250 ,office brewer is $3,125,000 and european brewer is $703,125
3) the company over all BEP units will be 27343.75 units or 27344 units
4 ) the overall impact if office brewer sales is doubled to 60,000 units
432692.30
5144230.77
the new BEP is $ would be $5,144,231
5) if the fixed cost of advertisement of $150,000 is allocated as per sales value , the new BEP will be as calculated below
the new BEP sales value is $5,658,654 and previous sales value is $$5,144,231 , the increase is $514,423 in sales value
Break Even calculation particulars Home brewer office brewer european brewer total sales unit 12000 30000 6000 48000 sales price per unit 150 200 300 Total sales value 1800000 6000000 1800000 9600000 variable per unit 120 140 180 total variable cost 1440000 4200000 1080000 6720000 contribution per unit 30 60 120 Total contribution value 360000 1800000 720000 2880000 Fixed cost is allocated as per sales value 281250 937500 281250 1500000 BEP in units = fixed cost /contribution per unit 9375 15625 2343.75 27343.75 BEP in $ = bep in units x selling price per unit 1406250 3125000 703125 5234375Related Questions
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