Gold Star Delicacies makes small-batch jams and jellies. Their workspace and equ

Question

Gold Star Delicacies makes small-batch jams and jellies. Their workspace and equipment cost them $2600 per month in loans, and operating costs total an additional $700 per week. The variable cost per batch of jam in materials and labor is $350. Each batch can fill 200 bottles and each bottle can sell for $3.75. Find the break-even point for how many batches of jam they must sell in a month, assuming they sell all the bottles from each batch produced. What happens to the break-even point if 8% of the bottles from each batch are wasted and cannot be sold? What happens to the original break-even point if, instead, costs per batch go up by another $75?

Explanation / Answer

It is assumed that there are 4 weeks in a month.

Workspace and equipment cost per month = $2600

Operating cost per month = $700*4 = $2800

Total fixed cost = 2600+2800 = $5400 per month

Revenue per batch = No. Of bottles * price per bottle = 200*3.75 = $750

Variable cost per batch = $350

Thus,

Break even point = total fixed cost / contribution per batch = 5400/(750-350) = 13.5 batches

Thus, to achieve break even, 13.5 batches or 14 batches needs to be sold in a given scenario.

If 8% of the bottles in a batch are wasted

Revenue per batch = No. Of bottles sold * price per bottle = 200*(1-8%) *3.75 = $690

Break even point = total fixed cost / contribution per batch = 5400/(690-350) =15.88 batches

Now, firm has to sell 15.88 batches or 16 batches of jam to achieve break even.

If costs per batch go up by another $75 (assumed that it is variable cost)

New variable cost per batch = 350+75 = $425

Break even point = total fixed cost / contribution per batch = 5400/(750-425) =16.62 batches

Now, 16.62 or 17 batches need to be produced to achieve break even in a changed scenario.

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