Question

7 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 $565 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: ped $ 14,694,150 Revenue Costs Manufacturing costs Allocated corporate costs (@5%) Product-line margin Allowance for tax (201) Product-line profit (loss) $ 14,444,395 734,700 Book 15,179,103 $ (484,953) 96.990 $ (387,963) Print 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 Ferences Most recent year Previous year Corporate Revenue Corporate Overhead Costs $ 114,750,000 $ 5,737.500 77,000,000 4,895,675 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 help with some analysis. In addition to the information given, Mr. Andre provides you with the following data on product costs for Bubbs 1 2 Cases 214,000 221,200 218,900 4 5 6 7 8 9 10 11 12 224,450 244,000 224,250 251,200 242,800 256,650 254,200 263,200 Production costs $1,151,840 1,174,340 1,182,993 1,198,535 1,200,839 1,221,685 1,196,711 1,239,786 1,238, 238 1,250,337 1,254,772 1,285,469

Answer 1

A) The cost of the product is $5.554, this is the minimum price which can be offered and which won't reduce profit.

	Particulars	Total Amount	Number of Unit	Price per Unit
	Revenue	1,46,94,150.00	26,00,734.51	5.65
	Cost	1,44,44,395.00	26,00,734.51	5.554
	Contribution	2,49,755.00	26,00,734.51	0.096

B) break even point = Total fixed cost / contribution per unit

= 734,700/0.096

= 7653125

so they have to sell 7653125 units in order to get the break even point.

C) considering the current contribution , taxes and corporate allocation we can not achive the goal. we can not achive it because our sales margin is 1.36.

for example when sale is 1000 times of break even sales units.

Number of Units	7653125000
Sales	43240156250
Cost	42505456250
Contribution	734700000
Corporate Allocation	734700
Profit before tax	733965300
Tax @ 20%	146793060
Profit after Tax	587172240
Net profit to Sales Ratio	1.36%

D) Assuming all costs and prices will be the same next year, and the drops of bubbs have no impact on decrease of corporate allocation, the profit before tax would reduce by the amount of current contribution i.e.2,49,755.00. Further if fixed production costs can be avoided. Profit before tax will be increasing till that extent.