A regional soft drink manufacturer is considering opening a new manufacturing pl
ID: 2723211 • Letter: A
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 depreciated value based on the expected life of the facility. It plans to sell soft drinks through its distributors to its existing 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 be approximately 30% based on the retail selling price. The manufacturing variable costs of the soda are estimated to be $0.28 per can. [a] Calculate the breakeven 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
a)
Total fixed cost = 100 million
Sales price per 24 pack = 13.99
Sale price per can = 13.99/24 = $0.58
Variable cost per can = $0.28
Contribution per can = 0.57-0.28 = 0.30
Break even Point = Fixed Cost / Contribution per unit = 100 million / 0.30 = 333.33 million cans.
that is around 14 million 24 pack boxes.
b)
Fixed cost if reduced by 35% will become 65 million next year
BEP = 65/.3 = 216.667 million cans.
c)
If variable cost decreases to 0.24 per unit, the contribution per unit becomes 0.58 - 0.24 = 0.34
BEP will be 100 / 0.34 = 294.12 million cans
d) desired profit = 20 million
Total contribution required = 20 + 100 =120 million
contribution per unit = 0.3
Number of units to be sold = 120 / 0.3 = 400 million cans.
e)
Break even point signifies the point where there is no profit adn no loss. management can decide about whether to start production or drop the plan, by checking the projected sales units. If the projected sales base on market study shows les number of units than the BEp, then it is better not to start production.
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