Question

Luke Corporation produces a variety of products, each within their own division. Last year, the managers at Luke developed and began marketing a new chewing gum, Bubbs, to sell in vending machines. The product, which sells for $5.30 per case, has not had the market success that managers expected and the company is considering dropping Bubbs. The product-line income statement for the past 12 months follows: $ 14,683,650 Revenue Costs Manufacturing costs Allocated corporate costs (@5%) Product-line margin Allowance for tax (@20%) Product-line profit (loss) $ 14,440,895 734,183 $ 15, 175,078 (491,428) 98,285 (393,143) $ All products at Luke receive an allocation of corporate overhead costs, which is computed as 5 percent of product revenue. The 5 percent rate is computed based on the most recent year's corporate cost as a percentage of revenue. Data on corporate costs and revenues for the past two years follow: Most recent year Previous year Corporate Revenue $ 107,750,000 76,300,000 Corporate Overhead Costs $ 5,387,500 4,683, 020 Roy O. Andre, the product manager for Bubbs, is concerned about whether the product will be dropped by the company and has employed you as a financial consultant to with In addition to the information given, Mr. Andre provides you with the following data on product costs for Bubbs: Month 1 2 3 4 5 6 Cases 208,000 217,700 215,400 229,000 224,900 238,000 220,700 247,700 239,300 253,100 250,700 259,700 Production Costs $1,143,328 1,164,828 1,173,481 1,189,023 1,191,327 1,212,173 1,187,199 1,230,274 1,228,726 1,240,825 1, 245, 266 1,275,951 8 9 10 11 12

Show all work please. Thank you!

Answer 1

a.

Ans : The cost of the product is 5.212 hence that is the minimum price which can be offered which wont reduce profit further

Particulars	Total Amount	Number of Unit	Price per Unit
Revenue	14,683,150.00	2,770,405.66	5.30
Cost	14,440,895.00	2,770,405.66	5.212
Contribution	242,255.00	2,770,405.66	0.088

b.

Breakeven sales unit = Fixed cost / contribution per unit

=734183/.088 =8342988.63

Break even sales unit = 8342988.63

c.

Considering current contribution, corporate allocation and taxes, it is not possible to achieve sales margin beyond 1.37% of sales :

Below is example when we sale 1000 time of breakeven sales unit

Number of Units	83,429,886,30.00
Sales (*5.30)	442,178,397,39.00
Cost (*5.212)	434,836,567,39.56
Contribution	734,182,999.44
Corporate Allocation	(734,183.00)
Profit before tax	733,448,816.44
Tax @ 20%	146,689,763.28
Profit after Tax	586,759,053.16
Net profit to Sales Ratio (PAT/Sales*100)	1.33%

d)

Assuming drops of bubbs have no impact on decrease of corporate allocation, the profit before tax would reduce by 242,255 (current contribution). Further if fixed production costs can be avoided, profit before tax will increase to such extent (its not possible to quantify such amount since information is not provided here)