Question

Exercise 3.32 All-Day Candy Company is a wholesale distributor of candy. The company services grocery, convenience, and drug stores in a large metropolitan area. The All-Day Candy Company has achieved small but steady growth in sales over the past few years, but candy prices have also been increasing. The company is reformulating its plans for the coming fiscal year. The following data were used to project the current year's after-tax income of $110,400: $4.00 per box Average selling price Average variable costs Cost of candy Selling costs Total Annual fixed costs Selling Administrative Total $2.00 per box 0.40 per box $2.40 per box $160,000 280,000 $440,000 Expected annual sales (390,000 boxes) = $1,560,000 Tax rate = 40% Candy manufacturers have announced that they will increase prices of their products an average of 15% in the coming year because of increases in raw material (sugar, cocoa, peanuts, and so on) and labour costs. All-Day Candy Company expects that all other costs will remain the same as during the current year. Your answer is correct. What is All-Day Candy Company's breakeven point in boxes of candy for the current year? Breakeven point 275,000 boxes

Answer 1

Increase in cost of candy = $2 + 15% = $2.3

Total variable cost = $2.3 + $0.40 = $2.70

Selling price = $1,560,000 / 390,000 = $4

Current contribution margin = ($4 - $2.40) / $4 = 40%

Variable cost is 60%

Average selling price per box = $2.70 / 60% = $4.5

Let the No of units to be sold to maintain same after tax income be “S”

Income before tax = $110,400 / 60% = $184,000

[($4 - $2.70) X S] - $440,000 = $184,000

S = 480,000 units to be sold to maintain same after tax profit.

Sales = $1,920,000 (480,000 units X $4)