You have been hired as a consultant for Wrigley a well-known and loved worldwide

Question

You have been hired as a consultant for Wrigley a well-known and loved worldwide manufacturer of chewing gum. Three of these brands - Juicy Fruit®, Wrigley's Spearmint® and Altoids® - have heritages stretching back more than a century. Wrigley sells its products in more than 180 countries around the world. The CEO of Wrigley, William Perez is in charge of a recent acquisition of a manufacturer of organic chewing gum, Natural Mint, Inc. which is located in Portland, Oregon. The company has one main product which is made in five flavors. He has asked you to prepare a preliminary cost-volume-profit analysis to determine whether changes should be made to the cost structure of selling expenditures.

The following information was presented for use in the analysis:

Fixed costs:

Variable Costs (per unit):

Administrative Costs: $245,000

Direct Materials: $0.075

Selling Costs: $260,000

Direct Labor: $0.055

Fixed Overhead Costs: $230,000

Variable Overhead: $0.035

Variable Selling: $0.010

Selling price per unit: $2.00

Questions (each question is independent of the others):

1. What is the current break-even point in units and in dollars? Also compute the margin of safety.

2. Assume the company sold 500,000 packs of gum last year. What is Natural Mint's operating leverage? If sales decreased 10%, by what % will Net Income decrease? Create a contribution margin income statement to prove that your calculations are correct.

3. What is the break-even point in units if variable selling costs are increased to 0.05 per unit? Would you recommend this change to the CEO if the expected sales level is 520,000 packages? Explain - consider the breakeven point and profit.

4. Independent of Question 3, what is the break-even point in dollars if the variable selling is eliminated and replaced with an increase to Fixed Selling costs of $200,000? Would you recommend this change to the CEO if the expected sales level is 550,000 units? Explain - consider the breakeven point margin of safety and profit.

Fixed costs:

Variable Costs (per unit):

Administrative Costs: $245,000

Direct Materials: $0.075

Selling Costs: $260,000

Direct Labor: $0.055

Fixed Overhead Costs: $230,000

Variable Overhead: $0.035

Variable Selling: $0.010

Explanation / Answer

Answer 1. SP Per Unit                     2.000 Variable Cost per Unit: Direct Materials                     0.075 Direct Labor                     0.055 Variable Overhead                     0.035 Variable Selling                     0.010 Total Variable Cost per Unit                     0.175 Contribution per Unit                     1.825 Contribution Margin Ratio 91.25% Fixed Costs: Administrative Costs        245,000.000 Selling Costs        260,000.000 Fixed Overhead        230,000.000 Total Fixed Costs        735,000.000 BEP (In Units) = Fixed Costs / Contribution Margin per Unit BEP (In Units) = $735,000 / $1.825 BEP (In Units) = 402,739.73 or say 402,794 Units BEP (In $) = Fixed Costs / Contribution Margin Ratio BEP (In $) = $735,000 / 91.25% BEP (In $) = $805,479.452 or say $805,480 (Approx.) Margin of Safety = Sales - BEP (In $) Margin of Safety = $1,000,000 - $805,480 = $194,520 Assume Company Sold 500,000 Packs of Gums Answer 2. Operating Leverage = Contribution / Net Operating Income Operating Leverage = $912,500 / $177,500 Operating Leverage = 5.14 (Approx.) Contribution = $1.825 X 500,000 = $912,500 Net Operating Income = $912,500 - $735,000 = $177,500 If sales Decrease by 10% Net Income decrease by = 10% X 5.14 Net Income decrease by = 51.41% Income Statement Contribution - $1.825 X 450,000 Units          821,250.00 Fixed Costs          735,000.00 Net Income            86,250.00 Net Income decrease by = ($177,500 - $86,250) / $177,500 Net Income decrease by = 51.41% Answer 3. SP Per Unit                     2.000 Variable Cost per Unit: Direct Materials                     0.075 Direct Labor                     0.055 Variable Overhead                     0.035 Variable Selling                     0.050 Total Variable Cost per Unit                     0.215 Contribution per Unit                     1.785 Contribution Margin Ratio 89.25% BEP (In Units) = $735,000 / $1.785 BEP (In Units) = 411,764.71 or say 411,765 Units (Approx.) Income Statement Contribution Margin - $1.785 X 520,000 Nos        928,200.000 Fixed Costs        735,000.000 Net Operating Income        193,200.000 Yes, the changes should be made as it will increase the Net Operating to $193,200 Answer 4. SP Per Unit                     2.000 Variable Cost per Unit: Direct Materials                     0.075 Direct Labor                     0.055 Variable Overhead                     0.035 Total Variable Cost per Unit                     0.165 Contribution per Unit                     1.835 Contribution Margin Ratio 91.75% Fixed Costs: Administrative Costs        245,000.000 Selling Costs        460,000.000 Fixed Overhead        230,000.000 Total Fixed Costs        935,000.000 BEP (In Units) = Fixed Costs / Contribution Margin per Unit BEP (In Units) = $935,000 / $1.835 BEP (In Units) = 509,536.78 or say 509,537 Units Margin of Safety = Sales - BEP (In $) Margin of Safety = $1,100,000 - $1,019,074 = $80,926 Income Statement Contribution Margin - $1.835 X 550,000 Nos    1,009,250.000 Fixed Costs        935,000.000 Net Operating Income          74,250.000 No, the change should not be made,a s it will decrease the net operating income to $74,250

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