Assume you direct market your pumpkins at a roadside farm stand called The Park-

Question

Assume you direct market your pumpkins at a roadside farm stand called The Park-n-Pick Pumpkin Patch during the month of October. Based on your marketing plan, you expect to sell 5,200 pumpkins at $2.25 each.  The variable cost to grow and sell each pumpkin is $1.50 each.  Your overhead costs at The Park-n-Pick Pumpkin Patch are $3,500.

a)How many pumpkins must you sell to breakeven?  Round to the nearest pumpkin.

b)If you sell the 5,200 pumpkins that you estimated in your marketing plan, will you make a profit or loss and how much is that profit or loss?  Round to the nearest cent.

c)Calculate the contribution margin percentage.

d)Calculate the breakeven point in dollars if the overhead costs increase by $500 as a result of remodeling the storefront of the farm stand, assuming everything else remains the same. Round to the nearest cent.

e)What is the minimum change in dollar sales needed to break even as a result of this increase in overhead costs? Round to the nearest cent.

f)How many pumpkins must be sold to breakeven after the storefront remodel?  Round to the nearest pumpkin.

g)If you have a fixed profit objective of $1,500, what should your selling price be per pumpkin (consider that the storefront remodel has occurred)?  Round to the nearest cent.

h)Should you revisit the pricing strategy in your marketing plan based on this fixed profit objective or should you moderate your profit goal? Explain.

Explanation / Answer

Answer

a)

Breakeven occurs when Total revenue is equal to total cost.

Let x be the amount he must sell in order to be break even.

Then, Total Revenue = P*Q = 2.25*x

Total Cost = Overhead Cost + Total Variable cost

= 3500 +1.5x

Hence

2.25x = 3500+1.5x

=> 0.75x= 3500

= X = 4667 units

b)

If TR - TC is positive then he makes profit and If TR - TC is negative then he suffer loss.

TR = 2.25*5200 = 11700

TC = 3500 + 1.5*5200 = 11300

=> Hence his total profit = 11700 - 11300 = 400

Hence he makes profit of $400.

c)

Contribution Margin Percentage = [(TR -TVC)/TR]*100

= [(11700 - 7800)/11700]*100

= [3900/11700]*100

= 33%

d)

Now, overhead cost increases from 3500 to 4000.

Breakeven point in dollars = Total Fixed expense/Contribution margin ratio

= 4000/0.33

= $12001

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