Question

Karges Coffee Inc. manufactures a line of single-cup brewing machines for home and office use that brew a cup of coffee, tea, or hot chocolate in less than a minute. The machines use specially packaged portions of coffee, tea, or hot chocolate that can be purchased online directly from Karges or at specialty coffee shops licensed to distribute the company's products. The company has three models of brewers that offer different features, such as the size of the water reservoir, the number of brewing sizes, and the types of filtering devices used in the machine. Data from the most recent fiscal year for the three models is shown below. Home Brewer Sales volume (units) 12,00 Unit selling price $150 Variable cost per unit 120 Contribution margin per unit) $30 Model Office Basic Office Deluxe 30,000 6,000 $200 $300 140 180 $ 60 $120 Fixed costs are $1,500,000 per year. The company has no work in process or finished goods inventories. The company is facing increased levels of competition from manufacturers using similar brewing technologies and believes there is no room for any increases in unit selling prices. Required 1. Calculate the company's operating income and overall break-even point in sales dollars. Calculate the sales dollars required for each product at the overall break-even level of sales and the units of each. 2. What is the margin of safety? Briefly explain?

Answer 1

(1)
Calculation of Operating Income:
	Home Brewer	Office Basic	Office Deluxe	Total
Contribution margin p.u	$30	$60	$120
No. of units sold	12000	30000	6000
Total Contribution	$3,60,000	$18,00,000	$7,20,000	$28,80,000
-Total Fixed costs				-$15,00,000
Operating Income				$13,80,000
Calculation of Sales % for each model & Overall PV Ratio
	Home Brewer	Office Basic	Office Deluxe	Total
No. of units sold	12000	30000	6000
Unit Selling Price	$150	$200	$300
Total Sales	$18,00,000	$60,00,000	$18,00,000	$96,00,000
% of sales for each model	18.75%	62.50%	18.75%
Overall PV Ratio
=Total Contribution/Total Sales
=2880000/9600000
30%
Overall Break-even Point
=Fixed Cost/Overall PV Ratio
=1500000/30%
$50,00,000
Sales Dollars required for each product at break even
	Home Brewer	Office Basic	Office Deluxe	Total
% of sales for each model	18.75%	62.50%	18.75%
Sales Required at Break-even	$9,37,500	$31,25,000	$9,37,500	$50,00,000
Unit Selling Price	$150	$200	$300
No. of Units	6250	15625	3125

2. Margin of Safety: Margin of safety is excess of sales than required for break-even. That is the Difference between Break-even sales and actual sales expressed in terms of Percentage is called Margin of safety.

Here, Break Even sales=$50,00,000

Actual sales = $ 96,00,000

Therefore, Margin of safety = (9600000-5000000)/5000000= 92%

3.

Calculation of Operating Income:
	Home Brewer	Office Basic	Office Deluxe	Total
Contribution margin p.u	$30	$60	$120
No. of units sold	12000	60000	6000
Total Contribution	$3,60,000	$36,00,000	$7,20,000	$46,80,000
-Total Fixed costs				-$15,00,000
Operating Income				$31,80,000

4. Overall sales to be increased to justify $150000 campaign

=$150000/PV Ratio= $1,50,000/30% = $ 5,00,000

5. Point of Indifference

=Additional Fixed cost/ Differencial Contribution p.u

=$150000/($120-$60) = 2500 units

Thus, 2500 customers must purchase Deluxe model instead of Basic Model to justify the campaign.

6. Break-even units

=Additional Fixed cost/Contribution p.u

=$108000/($250-$160)

=1200 units

Thus, 1200 units of the new brewer should be sold to offset the additional fixed costs.