Sweet Sue, Inc., produces a particularly rich praline fudge. Each 10-ounce box s

Question

Sweet Sue, Inc., produces a particularly rich praline fudge. Each 10-ounce box sells for $5.50. Variable unit costs are as follows:

                        Pecans                                        $0.75

                        Sugar                                            0.35

                        Butter                                           1.75

                        Other ingredients                         0.24

                        Box, packing material                  0.76

                        Selling commission                      0.55

            Fixed overhead cost is $24,000 per year. Fixed selling and administrative costs are $9,000 per year. Sweet Sue sold 35,000 boxes last year.

Required:

Explanation / Answer

1. Total Variable costs = $4.4

Contribution per unit = $5.5 - 4.4 = $1.1
Contribution margin ratio = 1.1/5.5 * 100 = 20%

2. Let no of units at breakeven be x
then, 1.1x - 33000 = 0
x = 33000/1.1 = 30,000
Sales revenue at breakeven = 30000 * 5.5 = $165,000

3.
Operating income = Sales revenue - variable costs = 35000 * (5.5 - 4.4) = $38,500

4.
Margin of safety = Current sales - breakeven sales = 35000 - 30000 = 5000 units

5.
New Breakeven:
1.6x - 33000 = 0
x = 33000/1.6 = 20,625 units

Operating income = 31500 * 1.6 = 50,400

As operating income increases from 38,500 to 50,400 Sweet Sue inc should raise the price.

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