Awash Winery produces two grades of beer: premium and regular. Premium sells for $10.50 per case and regular for $4.25 per case. Variable brewing costs per case are $5.10 for premium and $4.25 for regular. Sales of regular beer, in cases, are double those of premium. Fixed brewing costs are $600,000 monthly and fixed selling and administrative cost are $375,000 monthly. The only variable cost besides variable brewing costs is a 10% sales commission payable to hotels and distribution outlets.

Required

a) Compute the break-even point in total cases per month.

b) How many cases of each kind of beer are sold at break even?

c) The brewery is now selling about 350,000 cases per month. The advertising manager believes that sales of premium beer could be increased by 20% if an extensive advertising campaign were undertaken. The campaign would cost $80,000 per month. However, sales of regular beer are expected to fall by about 5% because some customers now buying the regular grade would merely switch to premium. Should the campaign be undertaken?

d) If the campaign in "c" above were undertaken, what is the weighted-average unit contribution margin?

e) What is the new break-even point in unit sales?

Answer rating: 100% (QA)

a To compute the breakeven point in total cases per month we need to determine the total fixed costs and the contribution margin per case Total Fixed ... View the full answer