FACTS: Mountain Bagels bakes and sells authentic New York style kettle-boiled ba

Question

FACTS:

Mountain Bagels bakes and sells authentic New York style kettle-boiled bagels. For the most recent year, Mountain Bagels sold 250,000 bagels at a selling price of $1 per bagel. During this same year, Mountain Bagels incurred fixed costs of $100,000 and variable costs of $0.40 per bagel.

Management of Mountain Bagels is considering extending their product line to include bagel sandwiches. Management estimates that adding bagel sandwiches would increase their total fixed costs by $25,000 per year and that the variable cost per bagel sandwich would be $1.80.

For the following questions, use an excel workbook to compute the answers. Show all of your work, i.e., show the formula you are using, the numbers you have inserted into the formula, and all of your calculations.

Be sure to answer all of the questions. If there are parts a, b, c and d, each should have an answer. If a has three questions, each should have an answer.

QUESTIONS:

a. Ignoring the new product line, how does Mountain Bagels' profit increase or decrease with the number of bagels sold? What was Mountain Bagels' profit for the most recent year?

b. How would adding bagel sandwiches change Mountain Bagels' profit? What information would you need before you can determine how introducing bagel sandwiches would affect Mountain Bagels' overall profit? Is it reasonable to assume Mountain Bagels will still sell 250,000 bagels?

c. Assume Mountain Bagels believes that, in addition to selling 250,000 bagels in the coming year, it can sell 25,000 bagel sandwiches. What price should Mountain Bagels charge per bagel sandwich if it wishes to increase overall profit by $50,000?

d. Assume Mountain Bagels believes that it can sell 25,000 bagel sandwiches at $4.50 but that this will reduce the number of bagels sold by 25,000 to 225,000 (i.e., there is a one-for-one tradeoff between bagels and bagel sandwiches). Assuming this sales mix remains constant, what is the break even point in sales dollars and units for each product?

Explanation / Answer

A) Data for current period for sale of Mountain Bagels Details Amount Sale Price 250000 bagels x $ 1 250000 Less: Variable cost 250000 bagels x $ 0.40 100000 Contribution Sale - Variable cost 150000 Less: Fixed Costs 100000 Profit 50000 With every increase in number of unit sold, profits will go on increasing and with fall in number of units sold, profits will be reduced Current Period profit = 50000 b) We need to have selling price for Bagel sandwich in order to identify its impact on overall profit of business No , It is not reasonable to assume mountain bagels will sell same units as before. Customers will be attracted to new line of product rather then old one. c) Data for Bagel Sandwich Variable cost 25000 bagels x 1.80 45000 Add: Fixed cost 25000 = Total cost of producing 25000 Bagel Sandwich 70000 Add: Expected Profits ( increase in overall profit by 50000) 50000 = Required Sale Value of 25000 Bagels 120000 Sellling price per unit = Expected sale value / bagels sold = 120000/ 25000 = 4.80 per bagel Reconciling we observe that Details Amount Sale Price 25000 bagels x $ 4.80 120000 Less: Variable cost 25000 bagels x $ 1.80 45000 Contribution Sale - Variable cost 75000 Less: Fixed Costs 25000 Profit 50000 Increase in profit on account of addition of bagel sandwich = 50000 So selling price be fixed at 4.80 per bagel sandwich d) Mountain Bagels Bagel Sandwich Selling price 1 4.5 less: Variable cost 0.4 1.8 Contribution per bagel 0.6 2.7 Fixed costs 100000 25000 Breakeven sales in units = Fixed cost / Contribution per unit Mountain Bagel = 100000 / 0.60 = 166667 units Bagel Sandwich = 25000 / 2.7 = 9260 units Breakeven sales in dollars = Breakeven units x selling price Mountain Bagel =166667 x 1 = 166667 Bagel Sandwich = 9260 x 4.5 = 41670

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