Question

Doyle’s Candy Company is a wholesale distributor of candy. The company services groceries, convenience stores and drugstores in a large metropolitan area. Small but steady growth in sales has been achieved over the past few years while candy prices have been increasing. The company is formulating I its plans for the coming fiscal year. Presented below are the data used to project the current year’s after-tax net income of $264960.Average Selling Price $9.60 per boxAverage Variable Cost:Candy Production $4.80 per boxSelling expense .96 per boxTotal $5.76 per boxAnnual fixed costs:Selling $384,000Administrative 672,000Total 1056000Expected annual sales volume 390,000 boxesTax Rate 40%Manufactures of candy have announced that they will increase prices of their products an average 15 percent in the coming year due to increaseIn raw materials (sugar, cocoa, peanuts, etc.) and labor costs. Doyle’s candy company expects that all other costs will remain at the same rates or levels as the current year.
Required:
A. What is Doyles Candy Company’s break-even point in boxes of candy for the current year?B. What selling price per box must Doyle’s Candy Company change to cover the 15 percent increase in variable production costs of candyAnd still maintain the current contribution margin percentage?C. What volume of sales in dollars must Doyle’s Candy Company achieve in the coming year to maintain the same net income after taxes as projected for the current year if the selling price of candy remains at $9.60 per box and the variable production costs of candy increase 15 percent?

Answer 1

Answer:

a) 275,000 boxed per year

b) sales price of $ 11.04

c) sale volume in dollars 4.830.967,74

Explanation:

selling price:   $ 9.60

Variable cost:  $ 5.76

Contribution:   $ 3.84

Contribution Ratio: 3.84 / 9.60 = 40%

$\frac{Fixed\:Cost}{Contribution \:Margin} = Break\: Even\: Point_{units}$

1,056,000 / 3.84 = 275,000

If Variable cost increase by 15%

To keep contribution ratio at 40% then selling price should be:

(X - 5.76 x 1.15) / X = 0.40

X = $ 11.04

To keep the same income but without changing price:

current income: (sales x contribution less fixed cost)

(390,000 x 3.84 - 1,056,000) = 441,600

contribution: (9.60 - 5.76 x 1.15) / 9.60 = 0.31

$\frac{Fixed\:Cost + Target \: Income}{Contribution \:Margin} = Break\: Even\: Point_{units}$

(1,056,000 + 441,600)/ 0.31 =

1.497.600‬ / 0.31 = 4.830.967,74