BUSI 2083 Introduction To Managerial Accounting

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25-03-2021

Question:

The company has three models of brewers that offer different features, such as the size of the water reservoir, the number of brewing sizes, and the types of filtering devices used in the machine. Data from the most recent fiscal year for the three models is shown below.

	Model
	Home Brewer	Office Brewer	European Deluxe
Sales volume (units)	12,000	30,000	6,000
Unit selling price	$150	$200	$300
Variable cost per unit	120	140	180
Contribution margin per unit	$30	$60	$120

Fixed costs are $1,500,000 per year. The company has no work in process or finished goods inventories. The company is facing increased levels of competition from manufacturers using similar brewing technologies and believes there is no room for any increases in unit selling prices.

Dark and Bold Inc. is unsure of the strategies to take in order to increase profitability. The engagement partner would like the following questions on his desk by Monday morning:

Calculate the company’s overall break-even point in sales dollars.
Calculate the sales dollars required for each product at the overall break-even level of sales calculated in (1) above.
Calculate the company’s overall break-even point in total units.
What impact would doubling the number of Office Brewer units sold next year have on the overall break-even point in sales dollars Assume that there will be no changes to the Home Brewer or European Deluxe unit sales, that unit selling prices and variable costs will remain the same for each model, and that total fixed costs will be unchanged.
The company is considering a new advertising campaign to raise overall consumer awareness of the product offerings. The total cost of the year-long campaign would be $150,000. By how much would sales need to increase overall for the company to be able to justify the new campaign Assume no change to the current product mix.
Suppose that instead of being designed to increase total sales volume, the new $150,000 advertising campaign will focus on getting customers who would have purchased the Office Brewer model to buy the European Deluxe model instead. To justify the cost of the new advertising, how many customers must purchase the European Deluxe model instead of the Office Basic model Assume that the new advertising campaign will have no impact on sales of the Home Brewer model.
The company is considering adding a new product to its line of brewers targeted at the office use market (both the Office Brewer and European Deluxe are currently targeting office users). The new brewer, the Office Plus, would sell for $250 per unit and would have variable unit costs of $160. Introducing the new model would increase fixed costs by $102,000 annually and reduce annual unit sales of the Office Brewer and European Deluxe models by 10% each. Assuming no change to the sales of the Home Brewer model, how many units of the Office Plus would need to be sold to justify its addition to the product line next year.

Answer:

The main information about the three models of brewing machines with different special features are summarised in the table and is highlighted below:

This brewer machine has different type of filtering devices.

Question 1

Break-even point of the company ($ sales)

Total sale of the company
Total variable cost of the company
Contribution margin ratio for the company
Break-even point of the company

Hence, the break-even point of the company is $5,000,000.

Question 2

Total sales dollars needed for each of the product at the calculated break-even point (Detscher, 2016).

Sales mix of Home Brewer Machine
Sales mix of Office Brewer Machine
Sales mix of European Deluxe Brewer Machine

Break-even sale dollars for each of the sales mix of brewer machine is calculated below:

Break-even point of the company is $5,000,000

Break-even sale dollars of Home Brewer Machine
Break-even sale dollars of Office Brewer Machine
Break-even sale dollars of European Deluxe Brewer Machine

Question 3

Break-even point of the company in total units .

Weighted average contribution margin (per unit) (Ross, et.al., 2014) = Contribution margin * Sale mix of the model

Weighted contribution margin for Home Brewer
Weighted contribution margin for Office Brewer
Weighted contribution margin for European Deluxe

Break-even point of the company

Hence, the break-even point of the company would be 25000 units.

Question 4

Number of office Brewer units that has sold next year for the overall break-even point sales.

Assumption

No change in the unit sales of Home Brewer or European Deluxe
Same unit sale price for each of the given model
Same variable cost for each of the given model
No change in the yearly fixe cost

It is apparent from the above that the overall break-even point sale comes out to be $5,144,231.50 which is higher than the previous break-even point i.e. $5,000,000. It is because the sale mix in case of each product has changed with respect to increase in the sold unit for any of the one product (Ross, et.al., 2014).

Question 5

Company has decided to start a new advertising campaign to increase the overall consumer familiarity about the products of the company.

Total cost of the campaign (year-long) = $150,000

Increase in the overall sales due to new advertising campaign

Assumption

No change of the current product mix

Weighted average contribution margin = 0.3

Hence, it can be seen that contribution margin comes out to be 30%. It is indication of the fact that weighted contribution margin is 30% of the advertisement cost. Therefore, 30% increase of the sale needs to be taken into account to justify the new advertisement campaign.

Question 6

Number of customers who would purchase European Deluxe model rather than Office model Assumption New advertising campaign would not create any impact on the total sale of Home Brewer model.

Advertising cost

Hence, it can be said that in regards to justify the new advertising, 2500 customers would purchase European Deluxe model rather than buying the Office Basic model (Detscher, 2016).

Question 7

Company has decided to add a new product (Office Plus) in their current product line.

Number of Office Plus that would be sold based on the given information =?

Per unit sale price per unit	$250
Per unit variable cost	$160
Fixed costs annually	$102,000
Annual reduction in the sale of Office and European Deluxe model	10%