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CVP and Break Even Analysis

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The Herschel Candy Company produces a single product: a chocolate almond bar that sells for $.40 per bar. The variable costs for each bar (sugar, chocolate, almonds, wrapper, and labor) total $.25. The total monthly fixed costs are $60,000. Last month, bar sales reached 1 million. However, the president of Herschel Candy Company was not satisfied with its performance and is considering the following options to increase the company's profitability.

1. Increase advertising.
2. Increase the quality of the bar's ingredients and simultaneously increase the selling price.
3. Increase the selling price with no change in ingredients.

Required
a. The sales manager is confident that an intensive advertising campaign will double sales volume. If the company president's goal is to increase this month's profits by 50% over last month's, what is the maximum amount that can be spent on advertising that doubles sales volume?

b. Assume that the company increases the quality of its ingredients, thus increasing variable costs to $.30 per bar. By how much must the selling price per unit be increased to maintain the same break even point in units?

c. Assume next that the company has decided to increase its selling price to $.50 per bar with no change in advertising or ingredients. Compute the sales volume in units that would be needed at the new price for the company to earn the same profit as it earned last month.

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Solution Summary

Solution describes the steps to find out the value of desired parameter in each case.

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a. The sales manager is confident that an intensive advertising campaign will double sales volume. If the company president's goal is to increase this month's profits by 50% over last month's, what is the maximum amount that can be spent on advertising that doubles sales volume?

New sales volume=2,000,000 units
Let the amount spent on advertising be A.
Total Fixed cost=60000+A

Initial ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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