2024 – Break Even Analysis Multiproduct Environment 1 Donald Tweedt started a company to produce and distribute natural fertilizers Donald s

Break-Even Analysis: Multiproduct Environment

 

1. Donald Tweedt started a company to produce and distribute natural fertilizers. Donald’s company sells two fertilizers that are wildly popular: green fertilizer and compost fertilizer.

 

Green fertilizer, the most popular among environmentally-minded consumers, commands the highest price and sells for $16 per 30-pound bag. Green fertilizer also requires additional processing and includes environmentally-friendly ingredients that increase its variable costs to $10 per bag. Compost fertilizer sells for $12 and has easily acquired ingredients that require no special processing. It has variable costs of $8 per bag. Tweedt’s total fixed costs are $35,000. After some aggressive marketing efforts, Tweedt has been able to drive consumer demand to be equal for each fertilizer.

Required:

Calculate the number of bags of green fertilizer that will be sold at break-even.

Target Profit Analysis

 

2. Kingman Corp. has been concerned with maintaining a solid annual profit. The company sells a line of fire extinguishers that are perfect for homeowners, for an average of $10 each. The company has perfected its production process and now produces extinguishers with a variable cost of $4 per extinguisher. Kingman’s annual fixed costs are $92,000. Kingman’s tax rate is 40 percent.

Required:

Calculate the number of extinguishers Kingman must sell to earn an after-tax profit of $60,000.

Make or Buy: Effect on Income

 

3. Engstrom, Inc., uses 10,000 pounds of a specific component in the production of life preservers each year. Presently, the component is purchased from an outside supplier for $11 per pound. For some time now, the factory has had idle capacity that could be utilized to make the component. Engstrom’s costs associated with manufacturing the component are as follows:

 

In addition, if the component is manufactured by Engstrom, the company will hire a new factory supervisor at an annual cost of $32,000.

 

Required:

If Engstrom chooses to make the component instead of buying it from the outside supplier, what would be the change, if any, in the company’s income?

Limited-Resource Decision

 

4. Kerrie Velinsky Productions produces music videos in two lengths on separate compact discs. The company can sell its entire production of either product. The relevant data for these two products follow:

Total fixed overhead is $240,000. The company has only 100,000 machine hours available for production. Because of the constraint on the maximum number of machine hours, Kerrie must decide which CD to produce to maximize the company’s income.

 

Required:

Compute the contribution margin per machine hour for each compact disk. Round to the nearest cent. 

Sell-or-Process Further Decision

 

5. DePaulis Furniture Manufacturers makes unfinished furniture for sale to customers from its own stores. Recently, the company has been considering taking production one step further and finishing some of the furniture to sell as finished furniture. To analyze the problem, DePaulis is going to look at only one product, a very popular dining room chair. The chair can be produced now for $65 and sells for $85 unfinished. If DePaulis were to finish the chair, the cost would increase to $90, but the company could sell the finished chairs for $125.

 

Required:

 

Compute the following in support of your answer. Input all amounts as positive values.

6. Matthew Hagen started his company, The Sign of Things to Come, three years ago after graduating from UpperStateUniversity. While earning his engineering degree, Matthew became intrigued by all of the neon signs he saw at bars and taverns around the university. Few of his friends were surprised to see him start a neon sign company after leaving school. Matthew is currently considering the introduction of a new custom neon sign that he believes will sell like hot cakes. In fact, he is estimating that the company will sell 700 of the signs. The new signs are expected to sell for $75 and require variable costs of $25. The new signs will require a $30,000 investment in new equipment.

Required:

A.  How many new signs must be sold to break even?

B.  How many new signs must be sold to earn a profit of $15,000 before taxes?

C.  If 700 new signs are sold, how much pre-tax profit will they generate?

D.  What would be the break-even point if the sales price decreased by 20 percent? Round your

E.  What would be the break-even point if variable costs per sign decreased by 40 percent?

F.  What would be the break-even point if the additional fixed costs were $50,000 rather than

Special-Order Decision: Qualitative Factors

 

7. Lindsey Smith, Inc., has the following cost structure for the upcoming year:

 

Required:

If an amount is zero, enter “0”.

A.  What is the expected level of profit?

B.  Should the company accept a special order for 1,000 units at a selling price of $20 if variable marketing expenses associated with the special order are $2 per unit?

What will be the incremental profit if the order is accepted?

C.  Suppose that the company received a special order for 3,000 units at a selling price of $19 with no variable marketing expenses. What would be the impact on profit?

D.  Assume that if the special order were accepted, all the regular customers would be aware of the price paid for the special order. Would that influence your decision? 

Decision Focus: Eliminating Unprofitable Segments

 

8. Casagrande Company is currently operating at 80 percent capacity. Worried about the company’s performance, Mike, the general manager, reviewed the company’s operating performance. Following are sales and related cost information about Casagrande, in millions of dollars:

 

Required:

A.  What is the current operating profit for the company as a whole?

B.  Assume that all fixed costs are unavoidable. If Mike eliminated the unprofitable segments, what would be the new operating profit for the company as a whole?

C.  What options does management have to maximize profits?

D.  What qualitative factors do you think management should consider before making this decision?

E. What impact could these qualitative factors have on the decision?

CVP: What-If Analysis

 

9. Last year, Mayes Company had a contribution margin of 30 percent. This year, fixed expenses are expected to remain at $120,000 and sales are expected to be $550,000, which is 10 percent higher than last year.

 

Required:

What must the contribution margin ratio be if the company wants to increase net income by $15,000 this year?

Operating Leverage

Burger Queen Restaurant had the following information available related to its operations from last year:

Required:

A.  What is Burger Queen’s operating leverage?

B.  If sales increased by 30 percent, what would Burger Queen’s new net operating income be?

Break-Even Analysis

 

Jimmy’s Seafood Restaurant is a family-owned business on the North Carolina coast. In the last several months, the owner has seen a drop-off in business. Last month, the restaurant broke even. The owner looked over the records and saw that the restaurant served 1,000 meals last month (variable cost is $10 per meal) and incurred fixed costs totaling $25,000.

 

Required:

Calculate Jimmy’s average selling price for a meal.