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

Question

Breakfast Inc. produces oatmeal. It currently sells the oatmeal in 10 Ib 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 . boxes at $20 per box. Breakfast Inc. produced 160.000 Breakfast Inc. is considering getting into flavoured oatmeal in place of the unfavoured 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 fliavour the oatmeal are expected to be $1 per 5 Ib. 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

a.break even point in dollars for oat meal = fixed cost / PV ratio

here,

Fixed cost = $100,000

PV ratio = contribution / sales

=> ($20 - $12) / $20

=>$8 / $20

=>0.40.

now,

break even point in dollars = $100,000 / 0.40

=>$250,000.

b. cost per box of flavoured oat meal = $7.3125 per 5lb box.

note: number of boxes will double from 160,000 to (160,000*2 = 320,000) if flavoured oat is decided to be sold.

calculation:

c.$0.20 Per lb is the incremental increase to operating income if flavoured oatmeal is sold.

contribution per lb for non flavoured oat meal = ($20 - $12) / 10 lbs

=>$0.80 per lb.

contribution per lb for flavoured oat meal = ($12- $7) / 5lbs....................($6+$1 =$7 is variable cost per 5 lb box)

=>$1 per lb

incremental increase by selling flavoured oat meal = $1 per lb - $0.80 per lb =>$0.20 per lb.

existing variable cost per box ($12 * 5 lb / 10lb) (since each box contains only 5lbs) $6 variable cost to flavour $1 total fixed cost per box ($100,000 / 320,000 boxes) $0.3125 total cost per box of flavoured oat meal $7.3125

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