Question

Nicholas Coffee roasts coffee the old-fashioned way (in gas-fired, rotating barrel roasters). It is selling its gourmet coffee beans at $20 per pound. Variable costs per pound are $8, and it has fixed cost of $840,000 per year.

1. Find its breakeven quantity in pounds/year, using the above data.

2. Nicholas is contemplating installation of digitally-controlled air-blown roasters. This will increase fixed cost to $1,200,000 per year, but it will lower variable cost to $5 per pound. If it installs the new roasters, what will be its breakeven quantity in pounds/year if it maintains its selling price at $20 per pound?

3. Express the breakeven quantity in (2) in dollar sales.

4. Nicholas does not believe it can sell more than 70000 pounds/year. What will it need to increase its price to if it is to breakeven at 70000 pounds per year, after installing the new air-blown roasting facilities?

5. What is the Contribution Margin Ratio (CMR), using $5 per pound variable cost and a price of $22.14?

6. What is the DOL if Nicholas is lucky and sells 80000 pounds per year at $22.14 per pound (after installing the new air-blown roasting facilities)?

Answer 1

(1)

Break-even quantity = Fixed cost / (Price - Unit variable cost) = 840,000 / (20 - 8) = 840,000 / 12 = 70,000

(2)

New break-even quantity = 1,200,000 / (20 - 5) = 1,200,000 / 15 = 80,000

(3)

New break-even quantity ($ sales) = New break-even quantity x Price = 80,000 x $20 = $1,600,000

(4)

If required price be P, then for break-even,

Quantity x (P - Unit variable cost) = Fixed cost

70,000 x (P - 5) = 1,200,000

P - 5 = 17.14

P = $22.14

NOTE: As per Answering Policy, 1st 4 parts are answered.