Question

MAMA MIA SPAGETTI FACTORY COST NOLUME /PROFIT CASE MAMMA MIA SPAGETTI IS LOCATED AT 100 SPUMONI AVENUE IN SALEM THEY MANUFACTURE A BOX OF THEIR PASTA FOR 50 CENTS PER BOX AND THEIR FIXED COSTS ARE $2000 PER ACCOUNTING PERIOD. THEY ARE PRICING THEIR PASTA AT $1.00 RETAIL THE COMPANY IS OPTIMISTIC THAT SALES WILL INCREASE AT A STEADY RATE OF 5% EACH MONTH. AFTER GRADUATING FROM WHATSAMATTA U YOU HAVE BEEN HIRED TO PROVIDE THE PRESIDENT SALVADORE DE'NAPOLI WITH SOME ECONOMIC DATA PRODUCTION BEGINS IN JANUARY ON THE 1ST 1.IF THE COMPANY IS AT BREAKEVEN WHAT IS THE AVERAGE TOTAL COST PER BOX? WHAT ABOUT AT 7000 BOXES? 2. BRAND LOYALTY HAS MADE THE PRODUCT PRICE INELASTIC. If THE PRICE IS RAISED TO $1.50 HOW MUCH SOONER DOES MAMA REACH BREAKEVEN POINT?

Answer 1

1)

Variable cost per box=VC=$0.50

Price per box=P=$1.00

Fixed cost=F=$2000

Contribution margin per box=P-VC=1-0.50=$0.50 per box

Break Even sales=F/(P-VC)=2000/(1-0.50)=4000 units

Quantity sold=Q=BEP=4000

Total Cost=TC=F+VC*Q=2000+0.5*4000=$4000

Average total cost at break even sales=TC/Q=4000/4000=$1 per box

Let us consider when Q=7000

Total Cost=TC=F+VC*Q=2000+0.5*7000=$5500

Average total cost at 7000 units=TC/Q=5500/7000=$0.7857 per box

2)

In new case

Variable cost per box=VC=$0.50

Price per box=P=$1.50

Fixed cost=F=$2000

Contribution margin per box=P-VC=1.5-0.50=$1.00 per box

Break Even sales=F/(P-VC)=2000/(1.50-0.50)=2000 units

Mama reaches break even point at 2000 units compared to 4000 units at a price of $1.00