Question

7. Bill Earner is unhappy about his latest sales results: his total dollar sales of products A and B have increased but his gross profit percentage has declined over the previous year. He wonders whether it is time to drop product B whose volume has declined to 2,000 units versus the 10,000 units sold of product A. Bill's total sales for the year were $400,000, his total cost of goods sold was $325,000 and his total overhead $50,000. Product B was Bill's first product and sold last year at $75 per unit (at factory). Bill calculated that it cost him $100,000 in materials and labour to produce B last year and he allocated $22.50 per unit towards his general overhead. Product A as been on the market for the past two years and cost Bill $10 per unit in materials and $12.50 per unit in labour to produce. Product A is made in a similar fashion to Product B so Bill has been able to produce it with only an additional $25,000 investment in new equipment (estimated life — five years). Since this investment was to be depreciated on a straight-line basis, Bill decided to have Product A bear this additional annual company overhead. No other overhead was charged to A. Should Bill drop B? Why? 8. Al Hoffman is wondering whether he should introduce a new butterscotch dessert flavour based on the test market information he has received. His new brand, that he produces for $0.18 per unit (variable costs), has sold for $0.29 per unit and has done well against his competitor's caramel brand. Al estimates his butterscotch would sell 250,000 units in its first year of which 125,000 would represent switches to his lower-priced butterscotch from the competing caramel. He is worried, however, since he also estimates 20 per cent of the butterscotch volume will come from his own chocolate customers (chocolate has a variable cost of $0.15 per unit and is sold for $0.25 per unit) and 20 per cent of the butterscotch volume will come from his own strawberry customers (strawberry has a variable cost of $0.17 per unit and is sold for $0.28 per unit). Last year, Al sold 1.5 million units of dessert, of which a third were strawberry. Al wants an improvement in his gross profitability of at least 10 per cent; otherwise he will not introduce butterscotch. What should he do?

Answer 1

Answer of 1
	Product B
	No. of units sold		2,000
	rate Per unit sold		75
	Total Sales of B ($)		1,50,000
	Total Sales A & B		4,00,000
	So the sales of A is (400000-150000)		2,50,000
	Product B Costing		$
	Material & labour		1,00,000
	Total Cost of material & labour in A &B		3,25,000
	So material & labour cost pertain to A (325000-100000)		2,25,000
	Overhead
	Pertain to B (No of Unit sold & rate) ( 2000*22.5)		45,000
	Total Overhead cost of A & B		50,000
	So the overhead cost pertain to A is (50000-45000)		5,000
		A	B	Total
	No. of Units	10,000	2,000	12,000
	Rate Per unit sold (rate of Product A is calculated -Total Sales/ No. of Units	25	75
	Sales ($)	2,50,000	1,50,000	4,00,000
	Cost of goods sold ($)	2,25,000	1,00,000	3,25,000
	Overhead ($)	5,000	45,000	50,000
	Profit ($)	20,000	5,000	25,000
	% of Profit on sales (profit/ Toal Sales *100)	8%	3%	6%
	Bill should drop product B as it is very less profitable & rate of return also very less as compare to product A
Answer of 2		Butterscotch	Chocolate	Strawberry
	Sales Price per unit	0.29	0.25	0.28
	Variable Cost per unit	0.18	0.15	0.17
	Last year profit comparison	Chocolate	Strawberry	Total
	Last year sales Unit ( From Total 1.5 one third is strawberry )	10,00,000	5,00,000	15,00,000
A	Sales Price per unit ($)	0.25	0.28
B	Variable Cost ($)	0.15	0.17
C	Profit per unit ($)	0.1	0.11
D	Total Profit (Total Unit Sold* Profit Per unit) (A*C) ($)	1,00,000	55,000	1,55,000
	With New product sales of chocolate & strawberry in this year	Chocolate	Strawberry
	Last year Sold	10,00,000	5,00,000
	less :- decrease in chocolate & strawberry sales (20% of 250000 of butterscotch units)	50,000	50,000
	So this year sales of Chocolate & Strawberry will be	9,50,000	4,50,000
		Butterscotch	Chocolate	Strawberry	Total
A	Total unit will sales in this year	250000	950000	450000	1650000
B	Sales Price per unit ($)	0.29	0.25	0.28
C	Variable Cost per unit ($)	0.18	0.15	0.17
D	Profit per unit ($) ( B-C)	0.11	0.1	0.11
E	Total Profit (A*D)	27500	95000	49500	172000
	Gross profit Increase as compare to last year =$172000-$155000=$17000
	So % increase in gross profit is = $17000/$155000*100= 10.9%
	Gross profit will increase by more than 10% so AI should go with new product of Butterscotch