Cost-Volume-Profit

Jen & Berrys sold 100,000 pints of ice cream last month according to the following contribution format income statement:

Total $ Per Unit $

SALES $325,000 $3.25

VARIABLE COSTS 200,000 2.00

CONTRIBUTION MARGIN $ 125,000 $ 1.25

FIXED COSTS 50,000

NET INCOME $ 75,000

A competing company, Un-Friendlys, also sold 100,000 pints of ice cream last month according to the following contribution format income statement:

Total $ Per Unit $

SALES $250,000 $2.50

VARIABLE COSTS 100,000 1.00

CONTRIBUTION MARGIN $ 150,000 $ 1.50

FIXED COSTS 75,000

NET INCOME $ 75,000

Both companies sold the same amount of ice cream and had the same Net Income but have different price and cost structures. Jen & Berrys uses higher quality ingredients (variable cost) and charges a higher price than its competitor. Un-Friendlys spends more on advertising (fixed cost) and sells at a lower price than Jen & Berrys.

Analysis of Ice Cream Companies

5. Using last months income statements on page 2, calculate the safety margin in units (pints of ice cream) for each company.

6. Jen & Berrys is considering two options to increase sales next month (and hopefully profit):

Option #1:

Double the pints sold next month by decreasing the price by 25 cents to $3.00.

Option #2:

Double the pints sold next month by spending an additional $30,000 next month

(fixed cost) on advertising. Price of ice cream remains at $3.25 per pint.

Which option should Jen & Berrys choose?? Explain your answer by showing calculations for both options.

7. Un-Friendlys is considering the same two options to increase sales next month (and hopefully profit):

Option #1:

Double the pints sold next month by decreasing the price by 25 cents to $2.25.

Option #2:

Double the pints sold next month by spending an additional $30,000 next month

(fixed cost) on advertising. Price of ice cream remains at $2.50 per pint.

Which option should Un-Friendlys choose?? Explain your answer by showing calculations for both options.