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Foods Inc (FI) sells 5 million units per year of its only product (Superfood) through a major...

Question:

Foods Inc (FI) sells 5 million units per year of its only product (Superfood) through a major retailer. superfoods? retail price is $5 per unit which included a margin to the retailer of 20%. Superfoods? manufacturing cost is $2 per unit. In order to promote sales, FI pays a sales broker 5% of the retail price of each unit sold. FI spends $3,800,000 per year in fixed costs.

1)Calculate Superfoods? per unit variable cost

2)Calculate Superfoods? unit contribution

3)Calculate Superfoods? Break-Even Volume

4)Compare the BEV calculated above with the actual sales of Superfood. Is FI making a profit? Why?

Variable Cost:

Variable cost is the cost that is directly linked with the number of units being produced. If the production increases, then the total variable cost will also increase. Variable cost includes all the direct costs incurred in the production process.

Answer and Explanation:

1.

Fixed cost per unit = 3,800,000/ 5,000,000 = $0.76 per unit

Manufacturing cost = $5 8 80% = $4

Variable cost per unit = $4 - $0.76 = $3.24


2.

Contribution per unit = 5 - 3.24

Contribution per unit = $1.76


3.

Break even volume in units = 2,171,429

BEP volume in Dollar = $10,857,143


4.

Yes FI is making profit of $4,950,000 because of good contribution margin and sales above BEP.


Explanation and working for all the points-

Particulars ($) per unit ($) per unit
Retail Sales price per unit 5.00
Less-
Variable cost
Retailers Margin per unit (20% of the retail sales price) 1.00
Manufacturing cost 2.00
Sales broker cost (5% of the retail sales price) 0.25
Total variable cost per unit 3.25
Contribution per unit (sales price - Variable cost) 1.75
Total fixed cost 3,800,000

Break even volume in units Fixed cost/Contribution margin per unit
Break even volume in units 2,171,429
Break even volume in dollar (BEP in units * Sales price per unit) 10,857,143

Profitability Comparison of actual sales and BEP sales

BEP sales Actual Sales
No. of units 2,171,429 5,000,000
Contribution @ 1.75 per unit 3,800,000 8,750,000
Less - Fixed cost 3,800,000 3,800,000
Profit 0 4,950,000

Learn more about this topic:

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