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For example, suppose a winery produces two types of wine: merlot and chablis. The following table summarizes prices and variable costs of the winery, which
For example, suppose a winery produces two types of wine: merlot and chablis. The following table summarizes prices and variable costs of the winery, which has fixed costs of $500,000 per year. Merlot Chablis Price per case $ 30 $ 20 Variable cost per case 20 15 Contribution margin per case $ 10 $ 5 For every case of merlot produced, three cases of chablis are produced. Define a wine bundle to consist of four cases of which one is merlot and three are chablis. Each wine bundle has revenues of $90 (1 * $30 + 3 * $20), variable costs of $65 (1 $20 + 3 x $15), and a contribution margin of $25 (1 x $10+ 3 $5). The number of bundles required to break even is: $500,000 Break-even number of bundles = Contribution margin Fixed costs = 20,000 bundles $25 Twenty thousand bundles needed to break even translate into 20,000 cases of merlot and 60,000 cases of chablis to break even. Hence, if a firm produces a variety of products in fixed proportions, then break-even analysis can be conducted by creating a standard bundle of products. = Exercise 2-6 Using the preceding winery example, how many cases of merlot and chablis must be produced and sold to make an after-tax profit of $100,000 if the tax rate is 20 percent
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