Question

24-1. Break-even analysis. Columbia Candy Company is a wholesale distributor of candy grocery, convenience, and drug stores in a large metropolitan area. Small but steady sales has been achieved by the company over the past few years while candy prices hav increasing. The company is formulating its plans for the coming fiscal year. Presentedb the data used to project the current year's aftertax net income of $110,400 below are Average sales price per box$ 4.00 Average variable costs per box: Cost of candy. Marketing Total $ 2.00 40 40 ... 2. Annual fixed costs: Marketing $160,000 280,000 Totat.. $440,000 Expected annual sales volume (390,000 boxes), $1, 560,000. Income tax rate, 40%. Manufacturers of candy have announced that they will increase prices of their products an average of 15% in the coming year due to increases in materials and labor costs. Columbia Candy Company expects that all other costs will remain at the same rates or levels as the current year Required: (1) The break-even point in boxes of candy for the current year. (2) The sales price per box the company must charge to cover the 15% increase in the costof (3) The volume of sales in dollars the company must achieve in the coming year to main candy and still maintain the current contribution margin ratio tain at the same net income as projected for the current year if the sales price of candy remains $4 per box and the cost of candy increases 15%. CMA adapted

Answer 1

1) Break-even point in boxes or in units = Fixed Cost/Contribution margin per unit

Fixed Cost = Marketing + Administration Fixed Costs

= $160,000 + $280,000

= $440,000

Contribution margin per unit = Selling price per box- Variable cost per box

= $4 per box - $2.40 per box

= $1.60 per box

Therefore, break-even point in boxes = $440,000/$1.60 per box

= 275,000 boxes

2) Sale price per box that company should charge to cover 15% increase in cost:

Current contribution margin percentage = Contribution margin per box/Selling price per box*100

= $1.60 per box/$4 per box

= 40%

That means, 40 of sales is Contribution and remaining 60% (100% - 40%) is variable cost.

Revised variable cost per box after 15% increase = ($2 + $2*15/100) + $0.40 per box

= $2.3 per box + $0.40 per box

= $2.7 per box

In order to maintain same same contribution margin but increasing 15% in variable cost, the selling price per box = $2.70*100/60 = $4.5 per box.

3) Income statement showing the Net Income:

Income before taxes = Contribution margin - Fixed Costs

$67,000 = ($4 per box - $2.7 per box)*Number boxes required to sell (X) - $440,000

$67,000 + $440,000 = $1.30 X

$507,000 = $1.30 X

X = $507,000/$1.30

X = 390,000 Boxes

Sales in dollars in order to achieve the same net income after taxes is $1,560,000 (390,000 * $4 per box).