vfridge manufactures mini-refrigerators. It currently produces one model the Bee

Question

vfridge manufactures mini-refrigerators. It currently produces one model the Beer Bud, and it is priced at $610. Manufacturing cost are $ 220 per unit and variable shipping costs are $ 60 per unit. Fixed Costs are $ 2574000. In 2016 it sold 9,800 units of the Beer Bud.

One of Vfridge's customers Grover Corp has asked if Vfridge could manufacture a new style of refrigerator, the Wine Pal, for 2017. Grover will pay $350 for the Wine Pal. The variable costs to produce the new fridge are estimated to be $ 175 per unit and Grover will pay for shipping. Vfridge expects to sell 10,000 units of Beer Bud and 4,000 units of Wine Pal.

The president of Vfridge checked the impact of accepting the Grover order on the breakeven sales revenuefor 2017 and was surprised to find that he dollar sales revenues require to break even using the sales mix for 2017 appeared to increase. He was not sure that his numbers were correct, but if they were, he felt incluined to reject the Drover order. He has asked for your advice.

a)Calculate the 2016 break even in dollars

b)Calculate the 2017 break even in dollars at the expected sales mix

c)Would you advise the president to accept or reject the Grover order (calc impact to income)?

Explanation / Answer

1-

selling price

610

less variable cost

280

contribution margin

330

contribution margin ratio

330/610

0.540984

Fixed cost

2574000

Break even sales in dollars

fixed cost/contribution margin ratio

4758000

2-

sales of Beer bud

(610*10000)

6100000

sales of Wine pal

(4000*350)

1400000

total sales

7500000

less variable cost

(10000*280)+(4000*175)

3500000

contribution margin

4000000

contribution margin ratio = contribution/sales

4000000/7500000

0.533333

Break even sales in dollars

fixed cost/contribution margin ratio

2574000/.5333

4826552

Present

Future

3-

sales

610*9800

5978000

7500000

less variable cost

280*9800

2744000

3500000

contribution margin

3234000

4000000

less fixed cost

2574000

2574000

operating income

660000

1426000

increase in income

766000

He should accept the offer as it results in increase in operating income

1-

selling price

610

less variable cost

280

contribution margin

330

contribution margin ratio

330/610

0.540984

Fixed cost

2574000

Break even sales in dollars

fixed cost/contribution margin ratio

4758000

2-

sales of Beer bud

(610*10000)

6100000

sales of Wine pal

(4000*350)

1400000

total sales

7500000

less variable cost

(10000*280)+(4000*175)

3500000

contribution margin

4000000

contribution margin ratio = contribution/sales

4000000/7500000

0.533333

Break even sales in dollars

fixed cost/contribution margin ratio

2574000/.5333

4826552

Present

Future

3-

sales

610*9800

5978000

7500000

less variable cost

280*9800

2744000

3500000

contribution margin

3234000

4000000

less fixed cost

2574000

2574000

operating income

660000

1426000

increase in income

766000

He should accept the offer as it results in increase in operating income

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