Question 2: Problem Solving

Freshiana Ltd. is a chemical company producing and selling hand sanitizers for $12 per bottle. Each bottle of sanitizers requires a plastic bottle costing $2 and chemicals costing $6. Freshiana's fixed costs total $60 000.

Required:

a.What is the contribution margin per bottle of hand sanitizers for Freshiana?

b.How many bottles of sanitizers Freshiana has to sell to reach the break-even point?

c.How much profit Freshiana will earn at a sales volume of 25 000 bottles?

d.Freshiana's target profit for next year is $160 000. How many bottles the company must sell to earn this target profit?

e.Freshiana's total fixed cost is going to increase to $80 000 due to a rent increase. In order to cope with this increase Freshiana is considering increasing the selling price to $16. The variable cost per bottle of sanitizer would remain unchanged.

Repeat the calculations from (a) to (d) above using this new information. Are these changes going to be a good for Freshiana? Why or why not? What other factors Freshiana should consider before raising the selling price?