Contribution Margin Format Example:

VolumeXX

SalesXX

Variable Costs (Listed)XX

Variable Costs (Total)XX

Contribution MarginXX

Fixed Costs (Listed)XX

Fixed Costs (Total)XX

Operating IncomeXX

Data for all questions:

Stuckie produces white school glue. Their glue bottles are primarily sold at department stores across the country. The cost of manufacturing and marketing their glue, at their normal factory volume of 20,000,000 bottles of glue per month, is shown in the table below. Stuckie sells their glue bottles for $1.50 each. Stuckie is making a small profit, but they would prefer to increase their Operating Income.

Hint: Fixed costs are shown on a per-unit basis in the table based on normal volume. However, fixed costs as a total do not change when volume changes, so you will need to determine total fixed costs first.

Per UnitPer Unit

Unit Manufacturing Costs:

Variable Materials$0.30

Variable Labor$0.35

Variable Overhead$0.10

Fixed Overhead$0.25

Total Unit Manufacturing Costs:$1.00

Unit Marketing Costs:

Variable Marketing Costs$.05

Fixed Marketing Costs$.20

Total Unit Marketing Costs:$.025

Questions:

Slime-making is a current fad, and this is creating a demand for larger bottles of glue. Stuckie's would like to offer larger bottles of glue to their customers (to support slime making). In order to have a second bottle size option, Stuckie's would need to invest in a new bottling line. This would increase fixed overhead costs by $4,000,000 per month. All variable costs (materials, labor, overhead & marketing) would increase 5X (500%) because of the bigger bottles and additional glue put into each bottle. Market research estimates that 5,000,000 of the larger bottles of glue could be sold per month.

A) If Stuckie's ONLY sells these new, larger bottles of glue, what is the minimum sales price per bottle they could accept and still have the same operating income (as question 1)? Show your results in a contribution margin income statement.

B) If Stuckie's can sell the larger bottles of glue for $10 each, what is the break-even point in units for the larger bottles of glue? (Show your calculation.)

C) If Stuckie's can sell the larger bottles of glue for $10 each, what is the break-even point in sales dollars for the larger bottles of glue? (Show your calculation.)

D) If the slime-making fad goes away, and Stuckie's needs to go back to selling only the small bottles of glue, what would be their maximum net operating income (based on maximum capacity and the additional factory investment)? Show your results in a contribution margin income statement.