Question

Izzy Ice Cream has the following price and cost information: $ 5.00 1.35 Price per 2-scoop sundae Variable cost per sundae: Ingredients Direct labor Overhead Fixed cost per month 0.45 0.20 $3,000 Required: 1. Determine Izzy's break-even point in units and sales dollars. 2. Determine how many sundaes must be sold to generate a profit of $6.000. 3. Calculate Izzy's new break-even point for each of the following independent scenarios: a. Sales price decreases by $0.50. b. Fixed costs decrease by $300 per month. c. Variable costs increase by $0.50 per sundae. 4. Based on the original information, how many sundaes must Izzy sell to generate a profit of $10,000, if sales price increases by $0.50 and variable costs increase by $0.30?

Answer 1

1) Variable cost per sundaes= Ingredients+Direct labor+Overhead= $1.35+0.45+0.20= $2.00

Contribution margin per sundaes= Sales price per sundaes-Variable cost per sundaes

= $5.00-2.00= $3.00

Break-even units= Fixed cost/Contribution margin per sundaes

= $3000/3= 1000 sundaes

Break-even sales= Break-even units*Sales price

= 1000*$5= $5000

Break-even units	1000	sundaes
Break-even sales	$5000

2) Break-even units= (Fixed cost+Target profit)/Contribution margin per sundaes

= ($3000+6000)/3= 3000 sundaes

Target sales

3000

sundaes

3-a) New sales price= $5.00-0.50= $4.50

Contribution margin per sundaes= Sales price per sundaes-Variable cost per sundaes

= $4.50-2.00= $2.50

Break-even units= Fixed cost/Contribution margin per sundaes

= $3000/2.50= 1200 sundaes

b) Net fixed costs= $3000-300= $2700

Break-even units= Fixed cost/Contribution margin per sundaes

= $2700/3= 900 sundaes

c) New variable costs= $2.00+0.50= $2.50

Contribution margin per sundaes= Sales price per sundaes-Variable cost per sundaes

= $5.00-2.50= $2.50

Break-even units= Fixed cost/Contribution margin per sundaes

= $3000/2.50= 1200 sundaes

		Break-even Point
3a.	Sales price decrease by $0.50	1200	sundaes
3b.	Fixed costs decreases by $300 per month	900	sundaes
3c.	Variable costs increases by $0.50 per sundae	1200	sundaes

4) New variable costs= $2.00+0.30= $2.30

New sales price= $5.00+0.50= $5.50

Contribution margin per sundaes= Sales price per sundaes-Variable cost per sundaes

= $5.50-2.30= $3.20

Break-even units= Fixed cost/Contribution margin per sundaes

= ($3000+10000)/3.20= 4063 sundaes

Break even units

4063

sundaes