Question

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Practice Problem 3 Jogger Industries sells two components with the following characteristics. Fixed costs for the firm total $200,000 per year. Part 1 $10 Sales Price Variable Cost Sales Volume $6 Part 2 $25 $17 60,000 units 40,000 units Required: 1. How many units of each product must the firm sell to break even? 2. The firm has determined that due to market changes the price of Part 1 can be increased to $14 with no impact on sales volume. What is the new break-even point in units? 3. Returning to the original information, Jogger's VP of Marketing believes that if the firm spends $60,000 on a new advertising campaign, sales of Part 2 will increase to 80,000 units without affecting the sales of Part 1. How many units of each product must the firm sell to break even under this new scenario? 4. The market changes in question 2 indicate additional overall demand for Part 1. The VP of Marketing believes that if the firm spends $60,000 on advertising of Part 1 instead of on Part 2 (as planned in question 3) the firm will be able to sell a total of 50,000 units of Part 1 at the new $14 selling price. If the company must choose only one product to advertise under this scheme which should it be and why?

Answer 1

Answer is given below

Part 1 Part 2 Total $25 Selling price Variable cost Contribution per unit $17 $8 60,000 Sales volume Sales mix 40,000 40% 60% 100,000 100% Weighted average contribution $1.60 $4.80 $6.40 Units $200,000 Break even point Weighted average contribution 31,250 $6.40 Sales mix Break even units 40% 12,500 60% 18,750 100% 31,250 Part 2 Total Part 1 $14 $25 Selling price Variable cost Contribution per unit S6 $17 $8 $8 40,000 100,000 Sales volume Sales mix 60,000 60% 40% 100% Weighted average contribution $3.20 $4.80 $8.00 Units Break even point Weighted average contribution $200,000 $8.00 25,000 I Sales mix Break even units 40% 10,000 60% 15,000 100% 25,000 Part 2 Total Part 1 $10 $25 Selling price Variable cost Contribution per unit $17/ $8 120,000 Sales volume Sales mix 40,000 33% 80,000 67% 100% Weighted average contribution $1.33 $5.33 $6.67 Units Revised Fixed cost Weighted average contribution $260,000 $6.67 39,000 Revised Fixed cost = $200,000+$60,000 Sales mix Break even units 33% 13,000 67% 26,000 100% 39,000 Part 1 Total 4 Selling price Variable cost Contribution per unit $14 $6 Part 2 $25 $171 $81 $8 Sales volume Sales mix 50,000 45% 60,000 55% 100% Weighted average contribution $3.64 $4.36 $8.00 Units Revised Fixed cost Weighted average contribution $260,000 $8.00 32,500 Revised Fixed cost = $200,000+$60,000 Sales mix Break even units 45% 14,773 55% 17,727 100% 32,500 The company should spend on Part 1 Since Break even point is lower Break even point has improved from 39,000 units to 32,500 units