Question

Karges Coffee 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 Karges or at specialty coffee shops 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, or 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. 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 are shown below: Model Home Brewer Office Basic Office Deluxe Sales volume (units) 12,000 30,000 6,000 $ 150 $ 200 $ 300 Unit selling price 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.

Answer 1

Part a & c

Home Brewer Office Basic Office Deluxe Total - One Sales Mix 12000 30000 6000 Particulars Sales Volume Sales Mix Unit Selling Price Less: Variable Cost Contribution per unit Fixed Costs (FC) S200 -$140 -$180| $150 -$120 $30 $15,00,000 $60 S480 1 Break Even Point - Units & Dollars Number of Sales Mix to be Sold = FC/Contribution per Sales Mix Number of Sales Mix to be Sold = 1500000 / 480 Break even Sales Mix in S 3125 x 1600 Home Brewer 3125 x 2 Break Even Sales Mix Office Basic 3125 x 5 in Units Office Deluxe 3125 x 1 Home Brewer 6250 x 150 Break Even Sales Mix Office Basic 15625 x 200 in Dollars Office Deluxe 3125 x 300 3125 $50,00,000 6250 15625 3125 $9,37,500 $31,25,000 9,37,500

part b

2 Target profit of S 1500,000 - Overall Sales in Dollars? Targeted Contribution = Targeted profit - Fixed Costs Targeted Contribution = 1500000 - 1500000 S30,00,000 Overall Sales in Dollars: Number of Sales Mix to be sold = Targeted Contribution Contribution per Sales Mix Number of Sales Mix to be Sold = 3000000/480 Overall Sales in Dollars =No of Sales Mix X Selling Price per Sales Mix Overall Sales in Dollars = 6250 x 1600 6250 $1,00,00,000

part d

Particulars Sales Mix Unit Selling Price Less: Variable Cost Contribution per unit Fixed Costs (FC) Home Brewer Office Basic Office Deluxe Total - One Sales Mix | 101 $150 $200 $300 $2,600 -$120|| -$1401 -$180 -$1,820 $301 $60 $780 $15,00,000 $1201 Break Even Point - Units & Dollars Number of Sales Mix to be Sold = FC/Contribution per Sales Mix Number of Sales Mix to be sold = 1500000 / 780 Break even Sales Mix in S 1924 x 2600 1924 $50,02,400

part e

4 New Advertising campaign to consumer awareness: Find Unit Sales need to be increased. Cost of the New Advertising campaign = $1,80,000 No. of Incremental Sales mix units to be sold to justify the campaign = ? No. of Incremental Sales mix units = 180000 / 480 375 In order to justify the campaign, the company should be able to incremental units to recover the cost incurred for the campaign by the way of contribution Home Brewer Office Basic Office Deluxe 375 x 5 375 x 1 750 1875 375

part f

Advertising Campaign for increase in sales volume of Office Deluxe instead of Office Basic Cost of the New Advertising campaign = $1,80,000 Contribution of Office Deluxe $120 Contribution of Office Basic $60 Difference in Contribution $60 No. of units of increase in Office deluxe to justify campaign = Cost incurred / Difference in Contribution No. of Units of Increase = 180000 / 60 3000 units