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Break-Even and Profit Analysis

Osgood, Inc. makes a gourmet dark chocolate syrup that is sells to coffee shops for use in making gourmet coffee drinks. Fixed costs for this product are estimated to be $180,000. The syrup is sold in cases of 12 bottles for $30. Variable costs are estimated at $1.00 per bottle.

Required:

In a memo to management, provide the following information:

What is the breakeven point in units? (a unit = 1 case)
How many bottles of syrup must be manufactured at the breakeven point?
Given the fact that the price of chocolate has increased dramatically over the past year, Osgood management is recommending a 10% increase in the selling price of the syrup. Variable costs have increased to $1.50 per bottle. If fixed costs are expected to remain the same, what would be the new breakeven point in units?
Management has budgeted sales of this product at $495,000. How many cases is that? How many bottles would have to be manufactured? How might an increase in the price affect sales of the product?
The budget from management forecasts net profits from sales of this product for next year of $45,000. This includes the 10% increase in the selling price along with the increased variable costs of $1.50 per bottle. How many units must be sold in order to meet this profit goal?

Solution Preview

To: Management
From: (Insert your name)
Subject: Proposed Changes in Production
Date: August 1, 2009

Thank you for the opportunity to review Osgood, Inc.'s current pricing and cost structure, as well as the effect of proposed changes upon it. I have determined that the current break-even point is ($180,000/($30-($1*12))), or 10,000 cases. At 12 bottles per case, this equates to (10,000*12), or 120,000 ...

Solution Summary

This solution illustrates computation of the break-even point in units and sub-units, as well as the effect of volume changes due to pricing decisions on the break-even point.

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