#2 A local not for profit has asked us for a special price for our beer. We woul
ID: 2561554 • Letter: #
Question
#2 A local not for profit has asked us for a special price for our beer. We would love to do something nice for our community but we can’t afford to lose any money. They would like 20 cases and have agreed to pick the beer up at the brewery. Because our sales staff is not involved in this order, there will be no variable selling costs. What price can we charge if we want to break even? If we sell the cases at a 50% discount, will net income go up or down and by how much? (SPECIAL ORDER)
One case of Pale Ale per unit Selling price $25 current volume 26,000 cases (24 beers in a case) malts $2.60 hops $2.40 yeast $0.50 packaging $5.00 *other production costs $4.50 *5 gallons of water for every gallon of beer, CO2, utilities, taxes shipping $1.75 selling $1.25 total variable costs $18.00 total fixed up to 28,000 capacity Salary brewer $1.15 $30,000.00 Salalry driver $0.77 $20,000.00 rent $1.92 $50,000.00 truck $0.92 $24,000.00 promotion exp $0.19 $5,000.00 total costs $22.96#2 A local not for profit has asked us for a special price for our beer. We would love to do something nice for our community but we can’t afford to lose any money. They would like 20 cases and have agreed to pick the beer up at the brewery. Because our sales staff is not involved in this order, there will be no variable selling costs. What price can we charge if we want to break even? If we sell the cases at a 50% discount, will net income go up or down and by how much? (SPECIAL ORDER)
Explanation / Answer
The price to break even, which can be offered : Total variable costs / number of quantity
= $18 - $3 (ie.shipping and selling variable cost) = $15 per unit
This is because the company is operating below its capacity, so it has be incurred the fixed cost, being sunk cost, if it accepts the special order or not. So, fixed cost could not be charged/considered for the special order.
If we sell the cases at a 50% discount, the net income will go down because the variable costs incurred for the order is $15 and the discounted selling price is $ (25 / 2) = $12.50. There is a lose of $2.5 per unit.
The net income go down by = $2.5 per unit * 20 units = $50
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