Cost-Volume-Profit Jen & Berry’s sold 100,000 pints of ice cream last month acco
ID: 2539892 • Letter: C
Question
Cost-Volume-Profit
Jen & Berry’s sold 100,000 pints of ice cream last month according to the following contribution format income statement:
Total $ Per Unit $
SALES $325,000 $3.25
VARIABLE COSTS 200,000 2.00
CONTRIBUTION MARGIN $ 125,000 $ 1.25
FIXED COSTS 50,000
NET INCOME $ 75,000
A competing company, Un-Friendly’s, also sold 100,000 pints of ice cream last month according to the following contribution format income statement:
Total $ Per Unit $
SALES $250,000 $2.50
VARIABLE COSTS 100,000 1.00
CONTRIBUTION MARGIN $ 150,000 $ 1.50
FIXED COSTS 75,000
NET INCOME $ 75,000
Both companies sold the same amount of ice cream and had the same Net Income but have different price and cost structures. Jen & Berry’s uses higher quality ingredients (variable cost) and charges a higher price than its competitor. Un-Friendly’s spends more on advertising (fixed cost) and sells at a lower price than Jen & Berry’s.
Analysis of Ice Cream Companies
5. Using last month’s income statements on page 2, calculate the safety margin in units (pints of ice cream) for each company.
6. Jen & Berry’s 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 25 cents to $3.00.
Option #2:
Double the pints sold next month by spending an additional $30,000 next month
(fixed cost) on advertising. Price of ice cream remains at $3.25 per pint.
Which option should Jen & Berry’s choose?? Explain your answer by showing calculations for both options.
7. Un-Friendly’s is considering the same two options to increase sales next month (and hopefully profit):
Option #1:
Double the pints sold next month by decreasing the price by 25 cents to $2.25.
Option #2:
Double the pints sold next month by spending an additional $30,000 next month
(fixed cost) on advertising. Price of ice cream remains at $2.50 per pint.
Which option should Un-Friendly’s choose?? Explain your answer by showing calculations for both options.
Explanation / Answer
5. Computation of Margin of Safety for Both Company Jen & Berry Unfriendly's Rate/ Unit Amount Rate/ Unit Amount Production & Sales unit 100000 100000 Sales (a) $3.25 $325,000.00 $2.50 $250,000.00 Variable Cost (b) $2.00 $200,000.00 $1.00 $100,000.00 Contribution Margin (c=a-b) $1.25 $125,000.00 $1.50 $150,000.00 Fixed Cost (d) $50,000.00 $75,000.00 Profit (c-d) $75,000.00 $75,000.00 Margin of Safety ( in Unit) Profit /Contribution Per Unit $75000/$1.25) 60000 Unit $75000/$1.50 50000 Unit 6. Comparison for 2 Option for ice cream sale by Jen & Berry Original Option -1 ( Double Sales / Reduce Sales Price by 0.25 Cent Option -2 ( Double Sales by increase fixed cost Rate/ Unit Amount Rate/ Unit Amount Rate/ Unit Amount Production & Sales unit 100000 200000 200000 Sales (a) $3.25 $325,000.00 $3.00 $600,000.00 $3.25 $650,000.00 Variable Cost (b) $2.00 $200,000.00 $2.00 $400,000.00 $2.00 $400,000.00 Contribution Margin (c=a-b) $1.25 $125,000.00 $1.00 $200,000.00 $1.25 $250,000.00 Fixed Cost (d) $50,000.00 $50,000.00 $80,000.00 Profit (c-d) $75,000.00 $150,000.00 $170,000.00 Option-2 : Double sales by increasing additional Fixed cost to be choosed by Jen & Berry to earn extra income $20000 as compare with Option-1 7. Comparison for 2 Option for ice cream sale by Un-friendly's Original Option -1 ( Double Sales / Reduce Sales Price by 0.25 Cent Option -2 ( Double Sales by increase fixed cost Rate/ Unit Amount Rate/ Unit Amount Rate/ Unit Amount Production & Sales unit 100000 200000 200000 Sales (a) $2.50 $250,000.00 $2.25 $450,000.00 $2.50 $500,000.00 Variable Cost (b) $1.00 $100,000.00 $1.00 $200,000.00 $1.00 $200,000.00 Contribution Margin (c=a-b) $1.50 $150,000.00 $1.25 $250,000.00 $1.50 $300,000.00 Fixed Cost (d) $75,000.00 $75,000.00 $105,000.00 Profit (c-d) $75,000.00 $175,000.00 $195,000.00 Option-2 : Double sales by increasing additional Fixed cost of $30000 to be choosed by Unfriendly's to earn extra income $20000 as compare with Option-1