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

1. Using last months income statements on page 2, calculate the Operating Leverage for each company.

2. If next months sales increased by 10% for both companies, would the Net Income for both companies once again be equal or would one company have higher profits than the other? Briefly explain.

3. If next months sales decreased by 10% for both companies, would the Net Income for both companies once again be equal or would one company have higher profits than the other? Briefly explain.

4. Using last months income statements on page 2, calculate the break-even point in units (pints of ice cream) for each company.

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.