Candyland produces a particularly rich praline fudge. Each 100 grams box sells for dollar 5.60....

Question:

Candyland produces a particularly rich praline fudge. Each 100 grams box sells for dollar 5.60. Variable unit costs are as follows:

Pecans $0.70
Sugar 0.35
Butter 1.85
Other ingredients 0.34
Boxes, packing material 0.76
Selling commission 0.20

Fixed overhead cost is dollar 32,300 per year. Fixed selling and administrative costs are dollar 12,500 per year. Candyland sold 35,000 boxes last year.

Required:

1) What is the contribution margin per unit for a box of praline fudge?

2) What is the contribution margin ratio?

3) How many boxes must be sold to break even?

4) What is the break-even sales revenue?

5) What was Candyland's operating income last year?

6) What was the margin of safety?

7) Suppose that Candyland raises the price to dollar 6.20 per box but anticipates a sales drop to 31 500 boxes. What will be the new break-even point in units? Should Candyland raise the price? Explain.

Variable costing:

Variable costing income statement is a type of income statement primarily used by management for internal reporting purposes only. Variable costing aids the management in the solving for break-even point , margin of safety and even performing sensitivity analysis of its earnings when certain variables change.

Answer and Explanation:

The following questions are quite straightforward since we can solve them using specific formulas . See detailed computation below:

Question 1

Prior to the computation of contribution margin per unit for a box of praline fudge, let us first determine the total variable cost as provided in the problem:

Variable cost
Pecans $0.70
Sugar 0.35
Butter 1.85
Other ingredients 0.34
Boxes, packing material 0.76
Selling commission 0.20
Total $4.20

Next, let us compute for the contribution margin per unit:

  • Contribution margin per unit = Selling price per unit - Variable cost per unit
  • Contribution margin per unit = $5.60 - $4.20
  • Contribution margin per unit = $1.40

Question 2

  • Contribution margin ratio = Contribution margin per unit / Selling price per unit
  • Contribution margin ratio = $1.40 / $5.60
  • Contribution margin ratio = 0.25 or 25%

Question 3

  • Break-even point (units) = Total fixed cost / Contribution margin per unit
  • Break-even point (units) = ($32,300 + $12,500) / $1.40
  • Break-even point (units) = $44,800 / $1.40
  • Break-even point (units) = 32,000 units

Question 4

  • Break-even point (dollars) = Total fixed cost / Contribution margin margin
  • Break-even point (dollars) = ($32,300 + $12,500) / 25%
  • Break-even point (dollars) = $44,800 / 25%
  • Break-even point (dollars) = $179,200

Question 5

  • Operating income = Total contribution margin - Total fixed cost
  • Operating income = (Contribution margin per unit x units sold) - Total fixed cost
  • Operating income = ($1.40 x 35,000 units) - ($32,300 + $12,500)
  • Operating income = $49,000 - $44,800
  • Operating income = $4,200

Question 6

  • Margin of safety = (Current sales level - Break-even point) / Current sales level
  • Margin of safety = ((35,000 units x $5.6) - $179,200) / (35,000 units x $5.6)
  • Margin of safety = ($196,000 - $179,200) / $196,000
  • Margin of safety = $16,800 / $196,000
  • Margin of safety = 0.0857 or 8.57%

Question 7

Since the price is increased to $6.20, let us now compute for the contribution margin per unit:

  • Contribution margin per unit = Selling price per unit - Contribution margin per unit
  • Contribution margin per unit = $6.20 - $4.20
  • Contribution margin per unit = $2

Next, let us compute for the new break-even point in units:

  • Break-even point (units) = Total fixed cost / Contribution margin per unit
  • Break-even point (units) = ($32,300 + $12,500) / $2
  • Break-even point (units) = $44,800 / $2
  • Break-even point (units) = 22,400 units

Now to answer the question whether to increase the selling price or not, let us now determine the increase (decrease) in the company's operating income if the new selling price is implemented:

  • Increase (decrease) in operating income = Total contribution margin at new selling price - Total contribution margin at old selling price
  • Increase (decrease) in operating income = ($2 per unit x 31,500 units) - ($1.40 per unit x 32,300 units)
  • Increase (decrease) in operating income = $63,000 - $45,220
  • Increase (decrease) in operating income = $17,780

Therefore, based on our computation, Candyland should raise the price since it will increase the operating income by $17,780.


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Variable Costing: Method, Formula & Advantages

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