Question

The following data is available for Milford Vinegar Co: Output level: (in units) 10,000 Bottles 15,000 20,000 n Sales price per bottle: Variable production costs: Fixed production costs: Fixed selling and administrative costs: Total costs: minns 18.00 37,000 100,000 40,000 177,000 15.00 55,500 100,000 40,000 195,500 12.00 74,000 100,000 40,000 214,000 estes i Requirements: 1. Prepare a contribution margin income statement for each level of production, include per unit detail. 2. Assuming that the company will sell all output - At what level is profit maximized? 3. Calculate the break even point in dollar sales and units for each level of production 4. Analyze the pricing schedule that Milford is using - Why might Milford offer a lower customer price at higher production levels? 5. Management believes that by dropping the price to $10.50 per bottle and paying their sales staff a commission of 50 cents per bottle it can sell 24,000 bottles - Do you recommend this approach? Provide proof/support for your answer Explain what the management should be considering in making this decision?

solve question 5 with explanations. thanks

Answer 1

Production Quantity	10,000	15,000	20,000
Sale price	18	15	12
Less: Variable cost	4	4	4
Contribution	14	11	8
Total Contribution	143,000	169,500	166,000

Maximum profit is earned at a production capacity of 15,000 units.As fixed costs are same they are not included for decision making.

Production Quantity	10,000	15,000	20,000
Sale price	18	15	12
Less: Variable cost	4	4	4
Contribution	14	11	8
Total Contribution	143,000	169,500	166,000
Fixed Cost	140000	140000	140000
P/v Ratio	79.44%	75.33%	69.17%
BEP (Units)	9790.21	12389.38	16867.47
BEP (Amount)	176223.8	185840.7	202409.6

The concept of reduced price at higher production capacity results in more profits due to same amount of fixed expenses.

Production Quantity	10,000	15,000	20,000	24,000
Sale price	18	15	12	10
Less: Variable cost	4	4	4	4
Contribution	14	11	8	6
Total Contribution	143,000	169,500	166,000	151,200
Fixed Cost	140000	140000	140000	140000
P/v Ratio	79.44%	75.33%	69.17%	63.00%
BEP (Units)	9790.21	12389.38	16867.47	22222.22
BEP (Amount)	176223.8	185840.7	202409.6	222222.2

Production of 24,000 units will result in reduced contribution margin and therefore it is not recommended to management. For making the decision management should consider contribution margin