Breakfast Inc. produces oatmeal. It currently sells the oatmeal in 10 lb. boxes

Question

Breakfast Inc. produces oatmeal. It currently sells the oatmeal in 10 lb. boxes at $20 per box. Breakfast Inc. produced 160,000 boxes of oatmeal last year at a variable cost of $12 per box (variable). Fixed costs were $100,000 (a) Calculate the break-even point in dollars for oatmeal $ Breakfast Inc. is considering getting into flavoured oatmeal in place of the unflavoured variety they currently produce. Flavoured oatmeal is sold in 5 lb. boxes, so Breakfast Inc. would produce twice as many boxes of flavoured than traditional. Market research suggests boxes of flavoured oatmeal would sell at $12 per 5 lb. box. Variable costs to flavour the oatmeal are expected to be $1 per 5 lb. box. There are no additional fixed costs. (b) Calculate the total cost per box of flavoured oatmeal $ per 5 lb. box c) Calculate the incremental increase (or decrease) to operating income if Breakfast Inc. were to make flavoured oatmeal in place of regular.$

Explanation / Answer

Boxes produced = 160000

Selling price = $20

Variable cost = $12

Fixed cost = $100000

Contribution = Selling price - Variable cost

= 20 - 12

= 8

Contribution margin = Contribution / sales * 100

= 8 /20 * 100

=40 %

Break even point in Dollars = Fixed cost / Contribution margin

= $100000 / 40%

= $ 250000

b) Total cost per box of flavoured oat meal = $ 420000

Variable cost per 5lb. box = $1

now 5lb. boxes , instead of 10lb. boxes therefore 320000 boxes produced

Fixed cost remains same

total cost = variable cost + Fixed cost

= 320000 * $ 1 + $100000

=$ 420000

c) Incremental operating income = ($ 11 * 320000) - ($8* 160000)

= 22,40,000

Operating income increased by 2240000

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