Part 2 Bill has been selling the bagels for $12.50 and $14.50 per dozen respecti
ID: 2553875 • Letter: P
Question
Part 2 Bill has been selling the bagels for $12.50 and $14.50 per dozen respectively, but is now concerned with his profit margin and is trying to determine whether or not he can afford to offer discounts or if actually needs to raise his price. Material (ingredients), labor, and overhead costs associated with the production of the bagels are $2.00 per dozen for the plain bagels and $3.50 per dozen for bagels with other ingredients added in. Total fixed costs are expected to average $14,000 per month and should be allocated based on bagels sales (see info below) and Bill would like to earn at least $ 5,000 per month of profit from bakery sales (this should also be allocated based on number of sales) Current Bagel Sales: Plain Bagels 1200 dozen Bagels with add in 800 dozen Requirement: Determine whether or not he can afford to offer discounts on the bagels and under what conditions using breakeven/cost profit volume analysisExplanation / Answer
Current Profit : Total contribution -fixed cost
= [12600+ 8800]-14000
= 7400
Since the minimum profit desired is $ 5000 ,Bill can afford to offer discount at present (since actual profit is 7400 )
2)
Total sales : [12.5*1200]+[14.5*800]
= 15000+ 11600
= 26600
% of plain sales : 15000/26600 = .5639
% of Badels with add : 11600/26600 = .4361
Weighted average contribution per unit :[Contribution Plain *% ]+contribution add*%]
= [10.5*.5639]+ [11*.4361]
= 5.92095+ 4.7971
=$ 10.71805per unit
Break even unit sales =[Fixed cost+desired profit] /weighted average contribution per unit
= [14000+5000]/ 10.71805
= 19000/10.71805
= 1773 bagels
Desired sales for Plain Bagels : 1773 * .5639 = 1000 bagels
Bagels with add : 1773*.4361 = 773 bagels
In order to achieve minimum profit of $ 5000 ,as long as units sales of Plain Bagels is 1000 or more and Bagels with add is $ 773 or more ,Bill can afford to provide discount .
Plain Bagels Bagels with add Price 12.5 14.5 less:variable cost (2) (3.5) contribution margin 10.5 11 Total contribution 10.5*1200= 12600 11*800= 8800