BREAK-FEAST Pvt Ltd, a food processing firm, has cake, biscuit, bread, burgers, etc in its product...

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BREAK-FEAST Pvt Ltd, a food processing firm, has cake, biscuit, bread, burgers, etc in its product mix. Recently it introduced a new product, processed and formed potato chips. The chips are sold in 1-pound canisters, but they are packed in cases of 50 canisters. A case is therefore considered the basic sales unit. Although management had made detailed estimates of cost and volume prior to undertakings this venture, new projections based on our actual cost experience are now desired Income statements for the last two quarters are each thought to be representative of the costs and productive efficiency we can expect in the next few quarters. There were virtually no inventories on hand at the end of either quarter. These income statements reveal the following. First quarter Sales (50000@ *24) Cost of goods sold Gross margin Selling and administration Net income before tax Tax Net income 1200000 700000 500000 650000 (150000) (60000) (90000) Second quarter (70000@ (24) 1680000 880000 800000 66000 The earnings and losses incurred by this product line are, so far, negligible in relation to the firm's overall earnings. The firm's overall marginal and average income tax rate is 40%. This 40% figure has been used to estimate the tax liability arising from the potato chip operation. 690000 110000 44000 Required: (a) Management would like to know the break-even point in terms of quarterly case sales for the chips. (b) Management estimates that there is an investment of 30,00,000 in this product line. What quarterly case sales and total revenue are required each quarter to earn an after-tax return of 20% on investment? (c) The firm's marketing people predict that if the selling price is reduced by *1.50 per case (*0.03 off per canister) and a *150000 advertising campaign is mounted to call consumers' attention to the new reduced price, sales will increase by 20% over second-quarter sales. Should the plan be implemented? Fixed cost of goods sold at 50000 units sales - 700000 - 50000 x 9 = * 250000 Selling and Administrative expenses are also mixed cost. Variable selling and administrative expense = changes in cost/changes in sales volume Sol: The cost of goods sold is a mixed cost here as it is neither remaining same in both the quarter nor proportionately changing. We have to separate it into fixed and variable components. Variable cost of goods sold = changes in cost / changes in sales volume - 180000/20000 = * 9 p.u. = (690000-650000)/(70,000-50000) = 2 per unit Fixed selling and administrative expenses- 650000-(50,000 x 2) = 550000. Total fixed cost = 250000 + 550000 = 800000 Total variable cost per unit= 9+2 = 11 per unit Selling price per case = 24 Contribution per unit = 24-11-13 per case or unit BREAK-FEAST Pvt Ltd, a food processing firm, has cake, biscuit, bread, burgers, etc in its product mix. Recently it introduced a new product, processed and formed potato chips. The chips are sold in 1-pound canisters, but they are packed in cases of 50 canisters. A case is therefore considered the basic sales unit. Although management had made detailed estimates of cost and volume prior to undertakings this venture, new projections based on our actual cost experience are now desired Income statements for the last two quarters are each thought to be representative of the costs and productive efficiency we can expect in the next few quarters. There were virtually no inventories on hand at the end of either quarter. These income statements reveal the following. First quarter Sales (50000@ *24) Cost of goods sold Gross margin Selling and administration Net income before tax Tax Net income 1200000 700000 500000 650000 (150000) (60000) (90000) Second quarter (70000@ (24) 1680000 880000 800000 66000 The earnings and losses incurred by this product line are, so far, negligible in relation to the firm's overall earnings. The firm's overall marginal and average income tax rate is 40%. This 40% figure has been used to estimate the tax liability arising from the potato chip operation. 690000 110000 44000 Required: (a) Management would like to know the break-even point in terms of quarterly case sales for the chips. (b) Management estimates that there is an investment of 30,00,000 in this product line. What quarterly case sales and total revenue are required each quarter to earn an after-tax return of 20% on investment? (c) The firm's marketing people predict that if the selling price is reduced by *1.50 per case (*0.03 off per canister) and a *150000 advertising campaign is mounted to call consumers' attention to the new reduced price, sales will increase by 20% over second-quarter sales. Should the plan be implemented? Fixed cost of goods sold at 50000 units sales - 700000 - 50000 x 9 = * 250000 Selling and Administrative expenses are also mixed cost. Variable selling and administrative expense = changes in cost/changes in sales volume Sol: The cost of goods sold is a mixed cost here as it is neither remaining same in both the quarter nor proportionately changing. We have to separate it into fixed and variable components. Variable cost of goods sold = changes in cost / changes in sales volume - 180000/20000 = * 9 p.u. = (690000-650000)/(70,000-50000) = 2 per unit Fixed selling and administrative expenses- 650000-(50,000 x 2) = 550000. Total fixed cost = 250000 + 550000 = 800000 Total variable cost per unit= 9+2 = 11 per unit Selling price per case = 24 Contribution per unit = 24-11-13 per case or unit