Question

A bread company can make up to 50,000 loaves of Original Formula bread per week. The machine start-up cost is $400, which occurs at the beginning of every week. The cost of ingredients for a loaf of bread is $1.25 for flour, and $0.25 for yeast. The company sells a loaf of bread for $2.50.

c) The company is considering introducing a 2nd type of bread that has cinnamon and raisin in it. This kind of bread still costs $1.25 for flour and $0.25 for yeast per loaf, but each loaf also costs $0.10 for cinnamon and $0.30 for raisins. If the company plans to price the Raisin bread at $3.50/loaf, how many loaves of bread does the company have to sell in order to break-even, given that the company plans to sell twice as much bread of the Original Formula as compared to Cinnamon Raisin bread (e.g., if the company makes 20 loaves of Original Formula, it will make 10 loaves of Cinnamon Raisin).

Answer 1

$400 setup cost is fixed cost

we will find contribution margin of both the bread

= selling price-variable expenses

Normal bread = $2.50-$1.25-$0.25

=$1

Cinammon bread = $3.5-$1.25-$0.25-$0.10-0.30

=$1.6

we will find weighted contribution

suppose sale of normal bread is X

Bread	Contribution margin	Weight	Weighted margin
normal	$1	1X	$1X (1*1)
Cinammon	$1.6	2X (twice as normal bread)	$3.2X($1.6*2)

To break even

fixed cost = contribution margin

$400 = $1X+$3.2X

$400=$4.2X

X=95(round off to nearest ) .........Normal bread

Y = 2X

=95*2 =190 loaves .......cinammon

Thus to break even it should sell 95 of normal bread 190 of cinammon bread

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