wine industrie

James Harris decides to start his own business. He decides to make his own wine according to a recipe received from his mother and to sell it in a commercial building located near his home. In return for his mother's recipe, James agreed to pay her a royalty of 10 cents per bottle sold.

The expenses and income are as follows:

Selling price per bottle $5.00

Variable unit costs:

- Purchase of ingredients Purchase of ingredients for manufacturing and bottling $1.40

- Royalty to his mother $0.10 Total variable costs $1.50

Annual fixed expenses: Rent 10,000 Salaries $5,000 Advertising 2,000 Permits $1,000 Other fixed expenses 3,000 21,000

Questions:

1. Calculate the contribution margin or marginal cost and the expected net profit. (James expects to sell 8,000 bottles in the first year)

2. Calculate the break-even point in sales dollars and units sold.

3. Calculate the margin of safety in dollars and units.

4. a) If the unit selling price increased by $1.00, what would be the break-even point in dollars of sales and units sold?

b) Do the same work assuming instead that variable costs increased by $1.00.

5. Let's refer back to the baseline data. If fixed costs increased by $1.400, what would be the break-even point in dollars and units sold? How many additional units would be needed to cover the increase in fixed costs?

6. Let's refer back to the baseline data. If the royalty to her mother was turned into a fixed cost increase of about $1,000 per year, what would be the break-even point in dollars and units sold? How many additional units would be needed to cover the increase in fixed costs?

7. What will be the accounting profit (or net loss). if (1) 10,000 bottles were sold (2) 12,000 bottles were sold.