Question

Jen & Berry’s sold 100,000 pints of ice cream last month according to the following contribution format income statement:

Total $                           Per Unit $

SALES                                        $330,000                            $3.30

VARIABLE COSTS                      200,000                           2.00

CONTRIBUTION MARGIN         $ 130,000                           $ 1.30

FIXED COSTS                                 50,000

NET INCOME                              $ 80,000

A competing company, Un-Friendly’s, also sold 100,000 pints of ice cream last month according to the following contribution format income statement:

Total $                           Per Unit $

SALES                                        $255,000                            $2.55

VARIABLE COSTS                      100,000                              1.00

CONTRIBUTION MARGIN         $ 155,000                           $ 1.55

FIXED COSTS                                 75,000

NET INCOME                              $ 80,000

Both companies sold the same amount of ice cream and had the same Net Income but have different price and cost structures. Jen & Berry’s uses higher quality ingredients (variable cost) and charges a higher price than its competitor. Un-Friendly’s spends more on advertising (fixed cost) and sells at a lower price than Jen & Berry’s.

1. Using last month’s income statements on page 1, calculate the Operating Leverage for each company.

2. Using last month’s income statements on page 1, calculate the break-even point in units (pints of ice cream) for each company.

3. Using last month’s income statements on page 1, calculate the safety margin in units (pints of ice cream) for each company.

4. Jen & Berry’s is considering two options to increase sales next month (and hopefully profit):

Option #1:

Double the pints sold next month by decreasing the price by 15 cents to $3.15.

Option #2:

Double the pints sold next month by spending an additional $20,000 next month

(fixed cost) on advertising. Price of ice cream remains at $3.30 per pint.

Which option should Jen & Berry’s choose?? Explain your answer by showing calculations for both options.

Answer 1

E н тук им 3.SAFETY MARGIN (UNITS) =Actual quantity-Break even point B C D 1 1. OPERATING LEVERAGE Units* (SP-VC) Units*(SP-VC)-FC Jen Un-friendly Units 100000 100000 3.3 2.55 VC 50000 75000 Jen = 100000-38462 61538 100000-48387 51613 SP Unfriendly= FC 10 DOL= Jen= 100000*(3.3-2) 100000*(3.3-2)-50000 =1.625 13 4. ANALYSIS OF OPTIONS OPTION 1- Double the no. of pints and decresing SP to $3.15 OPTION 2-Double the pints and spend $20000 FC more JEN OPTION 1 OPTION 2 Units 200000 200000 SP 3.15 3.3 2 Contribution 1230000 260000 50000 70000 Net income 180000 190000 Unfriendly VC 2 16 100000* (2.55-1) 100000(2.55-1)-75000 =1.9375 17 FC 18 19 Jen &Berry should choose option 2 as net income is more than option 1 20 2.BREAK EVEN POINT(UNITS) = Fixed cost/(Sp-VC) Jen Unfriendly FC 50000 75000 Contribution 1.3 1.55 BEP 38462 48387