Crunchy Morsels, Inc. manufactures and sells corn chips. Currently, Crunchy prod

Question

Crunchy Morsels, Inc. manufactures and sells corn chips. Currently, Crunchy produces only one type of corn chip. The chips are packaged in 11-ounce bags and sold to retailers for $1.50 per bag. The variable costs per bag are as follows:

Corn                                                      $0.70
Vegetable Oil                                     0.10
Miscellaneous ingredients             0.03
Selling                                                   0.10

Fixed manufacturing costs total $300,000 per year. Administrative (fixed) costs total $100,000.

a. Compute the # of bags of corn chips that must be sold by Crunchy to breakeven?
b. How many bags of corn chips must be sold for Crunchy to earn a before-tax profit of $150,000?
c. Assuming a tax rate of 60%, how many bags of corn chips must be sold to earn an after-tax profit of $284,000?

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

Break Even (Number) = Fixed Cost/Contribution Per Unit = 400000/(1.50 - .70 - .10 - .03 - .10) = 701754.38 or 701754 bags

Part B:

Desired Sales (Units) = (Fixed Cost + Desired Profit)/Contribution Per Unit = (400000 + 150000)/(1.50 - .70 - .10 - .03 - .10) = 964912.28 or 964912

Part C:

Before Tax Profit = 284000/(1-.60) = 710000

Desired Sales (Units) = (Fixed Cost + Desired Profit)/Contribution Per Unit = (400000 + 710000)/(1.50 - .70 - .10 - .03 - .10) = 1947368.42 or 1947368 bags

Thanks.

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