It’s Five O’clock Somewhere, LLC manufactures beverage containers. The company is anxious to produce and sell a new beverage container designed to keep beverages cool for up to 2 hours. The container will sell for $3 each. Enough capacity exists in the company’s plant to produce 14,000 of the new containers each month. $0.40 from every sales dollar is contribution margin. Fixed costs associated with the container would total $14,400 per month in the existing facility. The company’s Marketing Department predicts that if demand for the new container exceeds the 14,000 containers that the company is able to produce in its current facility that additional manufacturing space can be rented from another company at a fixed cost of $2,000 per month. The rented facility has a production capacity of 10,000 units per month. The variable cost percentage in the rented facility would equal 65% due to somewhat less efficient operations than in the company’s current facility. Which of the following statements is incorrect?
A. Even if the company produces less than 14,000 containers in its current facility, the total fixed costs will remain at $14,400.
B. The monthly breakeven point in the existing facility is greater than the monthly breakeven point in the rented facility.
C. The maximum monthly operating income that the company could make with the two facilities is $10,900.
D. As long as the company’s monthly target profit is less than or equal to $2,400, it will not need to rent the additional facility.
E. To make a monthly target profit of $5,000, a total of 20,381 containers must be produced and sold.
E. To make a monthly target profit of $5,000, a total of 20,381 containers must be produced and sold.
Total units need for $5,000 profit = 18,381
| Existing | New Rented | Total | |
| Selling price | 3 | 3 | |
| Variable cost | 1.8 | 1.95 | |
| Contribution | 1.2 | 1.05 | |
| Units | 14000 | 4,381 | 18,380.95 |
| Total Contribution | 16,800.00 | 4,600.00 | |
| Fixed Cost | 14,400.00 | 2,000.00 | |
| Operating Profit | 2,400.00 | 2,600.00 | 5,000.00 |
It’s Five O’clock Somewhere, LLC manufactures beverage containers. The company is anxious to produce and sell...
It’s Five O’clock Somewhere, LLC manufactures beverage containers. The company is anxious to produce and sell a new beverage container designed to keep beverages cool for up to 2 hours. The container will sell for $3 each. Enough capacity exists in the company’s plant to produce 14,000 of the new containers each month. $0.40 from every sales dollar is contribution margin. Fixed costs associated with the container would total $14,400 per month in the existing facility. The company’s Marketing Department...
It’s Five O’clock Somewhere, LLC manufactures beverage containers. The company is anxious to produce and sell a new beverage container designed to keep beverages cool for up to 2 hours. The container will sell for $3 each. Enough capacity exists in the company’s plant to produce 14,000 of the new containers each month. $0.40 from every sales dollar is contribution margin. Fixed costs associated with the container would total $12,000 per month in the existing facility. The company’s Marketing Department...
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