A regional soft drink manufacturer is considering opening a new manufacturing pl

Question

A regional soft drink manufacturer is considering opening a new manufacturing plant in the Midwest.Its total fixed costs are $100 million, with the cost of the new plant included in that figure at a depreciatedvalue based on the expected life of the facility. It plans to sell soft drinks through its distributors to itsexisting retail accounts. A review of consumer advertising shows that $13.99 is a common price for a 24-pack of 12-oz cans of soda at the local big box stores. Retailer margins in the industry are estimated to beapproximately 30% based on the retail selling price. The manufacturing variable costs of the soda areestimated to be $0.28 per can.

[a] Calculate the break-even volume.

[b]What would happen to the break-even point if the fixed costs could be reduced by 35% annually?

[c] What would happen if the variable costs decreased to $0.24 based on declines in commodity costs?

[d] Finally, what would the break-even be if the firm wanted to make a $20 million profit?

[e] Comment on the managerial significance of these numbers, based on your understanding of the break-even concept.

Explanation / Answer

Selling price for the firm = $13.99 x (1-0.3) = $9.793

Break-even volume = Fixed Cost/(Sales – Variable cost)
=> $100,000,000/($9.793 - $0.28) = 10,511,931 Units

Fixed cost after reduction = $100,000,000 x (1-0.35) = $65,000,000

New break-even volume = $65,000,000/($9.793-$0.28) = 6,832,755 Units

Break-even volume with new variable cost = $100,000,000/($9.793 - $0.24) = 10,467,916 Units

To find out the break-even for $20 million profits, we can add the amount to the total cost and will find out the break even.

Break-even volume for $20 million profit = $120,000,000/($9.793 - $0.28) = 12,614,317 Units

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