Question

Robert is thinking of entering the chewing gum market in the GTA Area. He is going to call his company “Chewy Chewing
Gum.” He realizes that the chewing gum industry is dominated by only three companies that keep the competition out
by spending a great deal on advertising. Nonetheless, Robert is tempted by the high profit margin. He plans to sell his
gum for a dollar per pack. Variable costs are $0.20 per pack. His fixed costs are estimated at $100,000. He currently has
the capacity to make and sell 200,000 packs a year. In order to justify spending his time on this venture, rather than
sitting at home, Robert needs to have an operating income of $15,000.

Instructions
a) What is Robert’s break even in units?
b) How many packs must Robert sell to achieve his target income of $15,000?
c) Is Robert’s plan feasible?

Answer 1

a) Break even point in units is = (Fixed cost/Contribution margin per unit) Fixed cost is $ 100,000/. Contribution margin per unit = (1-0.20) - $ 0.80/. Break even point in units is = (100000/0.80) Break even point in units is = 125,000 packs b) Packs needs to sell for income of $ 15,000/. Particulars Required income Add: Fixed cost Required contribution margin Add: Variable cost 20% of sales (115000*(20%/80%) Required sales Amount $ 15,000 100,000 115,000 28,750 143,750 C) Since Robert is selling 200,000 packs currently which is more than 143,750 packs for earnings a income of $ 15,000. Roberst plan is feasible.