Question

Izzy Ice Cream has the following price and cost information:

   Price per 2-scoop sundae $5.00

Variable cost per sundae:  

Ingredients 1.35

Direct labor 0.45

Overhead 0.20

Fixed cost per month $7,500

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 $15,000.

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 $40,000, if sales price increases by $0.50 and variable costs increase by $0.30?

Answer 1

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet.

Answer Part 1) Break even point in units = fixed cost / contribution margin per unit = 7500/(5-1.35-45-2) = 2500 Units Break even dollar sales = break even unit * selling price = 2500*5 = $ 12500 Thus the final answer break even point in units = 2500 Units Break even dollar sales = $ 12500 Part 2) No. of sundaes to be sold to earn desired profit = (desired profit + fixed cost ) / contribution margin per unit = (7500+15000)/(5-1.35-45--2) = 22500/3 = 7500 Units Thus the correct answer is 7500 units

Part 3) New Break even point if sale price decrease by $.5 = Fixed cost / revised contribution margin = 7500 /( 4.5-1.35-45-2) = 3000 units Bnew break even point if fixed cost decreases by $ 300 = Fixed cost / revised contribution margin = (7500-300)/(5-1.35-45-2) = 2400 Units New Break even point if variable cost increases by $.5 = Fixed cost / revised contribution margin = 7500 /(5-1.85-45-.2) = 3000 units 3000 Part 4) No. of units to be sold = (fixed cost + desired profit)/contribution margin = (7500+40000)/(5.5-1.65-45--2) = 14844 Units Thus the correct answer is 14844 Units