Question

2. Kylie's Cookies is considering the purchase of a larger oven that will cost $2,200 and will increase her fixed costs by $59. What would happen if she purchased the new oven to realize the variable cost savings of $0.10 per cookie, and what would happen if she raised her price by just $0.20? She feels confident that such a small price increase will decrease the sales by only 25 units and may help her offset the increase in fixed costs. Given the following current prices how would the break-even in units and dollars change if she doesn't increase the selling price and if she does increase the selling price? Complete the monthly contribution margin income statement for each of these cases. Selling price, variable cost, and fixed cost change analysis With Current With decreased VC With increased SP. Price and increased FC decreased VC, and increased FC Sales price per unit $1.75 Variable cost per unit Contribution margin per unit $1.35 Fixed costs $ 405 0.40 300 Break-even in units Break-even in dollars $ 525 Monthly contribution margin income statement Unit sales, expected 800 Sales Variable costs Contribution margin Fixed costs Net income

Answer 1

Selling price, variable cost, and fixed cost change analysis
	With current price	With decrease VC and Increased FC	With Increased SP, decreased VC and Increased FC
Sales price per unit ($1.75 + $0.20) (a)	$1.75	$1.75	$1.95
Variable cost per unit ($0.40 - $0.10) (b)	$0.40	$0.30	$0.30
Contribution margin per unit (c = a - b)	$1.35	$1.45	$1.65
Fixed costs ($405 + $59) (d)	$405	$464	$464
Break-even in units (d/c)	300	320	281
Break-even in dollars (d/e)	$525	$560	$548
Contribution margin ratio (e ) (c/a*100)	77%	83%	85%
Monthly contribution margin income statement
Units sales, expected (800 + 25 units)	800	800	825
Sales (800 * $1.75 per unit); (825 * $1.95 per unit)	$1,400.00	$1,400.00	$1,608.75
Less: Variable costs (800 * $0.40); (825 *$0.30)	$320.00	$240.00	$247.50
Contribution margin	$1,080.00	$1,160.00	$1,361.25
Less: Fixed costs	$405	$464	$464
Net Income	$675.00	$696.00	$897.25