Question
Jen & Berrys sold 100,000 pints of ice cream last month according to the following contribution format income statement: Total $ Per Unit $ SALES
|
Total $ Per Unit $
SALES $330,000 $3.30
VARIABLE COSTS 200,000 2.00
CONTRIBUTION MARGIN $ 130,000 $ 1.30
FIXED COSTS 50,000
NET INCOME $ 80,000
|
Total $ Per Unit $
SALES $255,000 $2.55
VARIABLE COSTS 100,000 1.00
CONTRIBUTION MARGIN $ 155,000 $ 1.55
FIXED COSTS 75,000
NET INCOME $ 80,000
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.
- Using last months income statements on page 1, calculate the Operating Leverage for each company.
- Using last months income statements on page 1, calculate the break-even point in units (pints of ice cream) for each company.
- Using last months income statements on page 1, calculate the safety margin in units (pints of ice cream) for each company.
- 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 15 cents to $3.15.
Option #2:
Double the pints sold next month by spending an additional $20,000 next month
(fixed cost) on advertising. Price of ice cream remains at $3.30 per pint.
Which option should Jen & Berrys choose?? Explain your answer by showing calculations for both options.
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