Question

Background

You are a Consultant for the professional service firm, BUSI 2083 LLP. Your firm specializes in providing a wide variety of internal business solutions for different clients. A consumer business partner within the firm notices your availability at 3:00 PM on a Friday afternoon and pulls you into a meeting with one of his high-profile clients.

Dark and Bold Inc. manufactures a line of single-cup brewing machines for home and office use that brew a cup of coffee, tea, or hot chocolate in less than a minute. The machines use specially packaged portions of coffee, tea, or hot chocolate that can be purchased online directly from Dark and Bold or at Second Cup coffee shops who are licensed to distribute the company’s products. The appeal of the brewing machines is twofold. First, they offer a high level of convenience. The use of prepackaged coffee servings means no grinding of coffee beans and no mess. Also, the brewing machines have a water reservoir that for some models is large enough to make up to 20 cups of coffee. Second, the taste of each cup of coffee, tea, and hot chocolate is very consistent. The brewers’ pressurized system uses the same amount of water for each cup and the airtight seal used in the individual portions keeps the product fresh.

Additional Information

The company has three models of brewers that offer different features, such as the size of the water reservoir, the number of brewing sizes, and the types of filtering devices used in the machine. Data from the most recent fiscal year for the three models is shown below.

	Model
	Home Brewer	Office Brewer	European Deluxe
Sales volume (units)	12,000	30,000	6,000
Unit selling price	$150	$200	$300
Variable cost per unit	120	140	180
Contribution margin per unit	$30	$60	$120

Fixed costs are $1,500,000 per year. The company has no work in process or finished goods inventories. The company is facing increased levels of competition from manufacturers using similar brewing technologies and believes there is no room for any increases in unit selling prices.

Dark and Bold Inc. is unsure of the strategies to take in order to increase profitability. The engagement partner would like the following questions on his desk by Monday morning:

1. Calculate the company’s overall break-even point in sales dollars.
2. Calculate the sales dollars required for each product at the overall break-even level of sales calculated in (1) above.
3. Calculate the company’s overall break-even point in total units.
4. What impact would doubling the number of Office Brewer units sold next year have on the overall break-even point in sales dollars? Assume that there will be no changes to the Home Brewer or European Deluxe unit sales, that unit selling prices and variable costs will remain the same for each model, and that total fixed costs will be unchanged.
5. The company is considering a new advertising campaign to raise overall consumer awareness of the product offerings. The total cost of the year-long campaign would be $150,000. By how much would sales need to increase overall for the company to be able to justify the new campaign? Assume no change to the current product mix.
6. Suppose that instead of being designed to increase total sales volume, the new $150,000 advertising campaign will focus on getting customers who would have purchased the Office Brewer model to buy the European Deluxe model instead. To justify the cost of the new advertising, how many customers must purchase the European Deluxe model instead of the Office Basic model? Assume that the new advertising campaign will have no impact on sales of the Home Brewer model.
7. The company is considering adding a new product to its line of brewers targeted at the office use market (both the Office Brewer and European Deluxe are currently targeting office users). The new brewer, the Office Plus, would sell for $250 per unit and would have variable unit costs of $160. Introducing the new model would increase fixed costs by $102,000 annually and reduce annual unit sales of the Office Brewer and European Deluxe models by 10% each. Assuming no change to the sales of the Home Brewer model, how many units of the Office Plus would need to be sold to justify its addition to the product line next year?

Answer 1

IF YOU HAVE ANY DOUBTS COMMENT BELOW I WILL BE TTHERE TO HELP YOU..ALL THE BEST..

AS FOR GIVEN DATA..

1. Calculate the company’s overall break-even point in total units.
2. What impact would doubling the number of Office Brewer units sold next year have on the overall break-even point in sales dollars? Assume that there will be no changes to the Home Brewer or European Deluxe unit sales, that unit selling prices and variable costs will remain the same for each model, and that total fixed costs will be unchanged.
3. The company is considering a new advertising campaign to raise overall consumer awareness of the product offerings. The total cost of the year-long campaign would be $150,000. By how much would sales need to increase overall for the company to be able to justify the new campaign? Assume no change to the current product mix.

Break Even point is the points when Total Revenue meets the total Cost till the time the number of units produced is called break even point.

Total Cost= Total Fixed Cost + Total Variable Cost

Total Revenue= Unit sales value * Qty. Sold

we will apply the same formula to the question above then we find below solution:

Calculation is given in table.

	Home Brewer	Office Brewer	European Deluxe	Total for all Units produced
					Sales volume (units)	12,000	7,000	6,000	25,000
Unit selling price in $	150	200	300
Variable cost per unit in $	120	140	180
Contribution margin per unit in $	30	60	120
Total Sales Revenue	1800000	1400000	1800000	50,00,000
Total Variable Cost	1440000	980000	1080000
Fixed Cost	15,00,000.00
Total Cost				50,00,000

Therefore at total quantity of 25000 Unit with below product mix break even will be achieved during the FY.

Home Brewer-12000	Office Brewer- 7000	European Deluxe - 6000

Formula for this would be as below:

No. of Home brewer sold * Unit sales price +  No. of office brewer sold * Unit sales price + No. of Eu Deluxe sold * Unit Sales price = (Total Fixed Cost) + No. of Home brewer sold * variable cost of home brewer +  No. of office brewer sold * variable cost of office brewer + No. of Eu Deluxe sold * variable cost of Eu. delux

Since we have to maintain the product mix therefore Take Home Brewer=12000 units and European deluxe=6000 and then calculate balance Officer brewer for achieving the break even.

Calculation will give 7000 units.

There won't be any impact on the break even value of $5000,000 even if we double the number of office brewer. it will re-main the same as we are not changing the other two models sales and any sales or cost value of each item.

After considering the cost of adv. campaign of $150000 the fixed Total fixed cost will rise to  $1650000, then after applying the same above formula the following will be change in break even value it will become $5500000 and total quantity of 27500 instead of earlier 25000.

	Home Brewer	Office Brewer	European Deluxe	Total for all Units produced
					Sales volume (units)	12,000	9,500	6,000	27,500
Unit selling price in $	150	200	300
Variable cost per unit in $	120	140	180
Contribution margin per unit in $	30	60	120
Total Sales Revenue	1800000	1900000	1800000	55,00,000
Total Variable Cost	1440000	1330000	1080000
Fixed Cost , including the advertisement cost	16,50,000.00
Total Cost				55,00,000

I HOPE YOU UNDERSTAND..

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