Question

A typical Latino coffee farmer has fixed costs of $10,000 per year. Under the old distribution system, the farmer is paid $.40 per pound (U.S. weight measure) and the farmer’s variable cost per pound is $.30. What is the farmer’s breakeven point in units (pounds) under the old system? What is the farmer’s breakeven point in dollars? Show all math.

Contribution margin=Revenue-Variable cost

=(0.4-0.3)=$0.1 per pound

Hence breakeven point=Fixed costs/Contribution margin

=(10,000/0.1)=100,000 pounds

=(100,000*0.4)=$40,000.

Under the new distribution system, the farmer is paid $1.26 per pound, what is the farmer’s breakeven point in units (pounds) now? What is the farmer’s breakeven point in dollars? Show all math.

Answer 1

Under new distribution system, we see that there is increase in price paid to farmer from present 0.40 per pound to 1.26 per pound. So, variable cost to the farmer i.e 0.30 per pound remains same.

Basic working required to answer the question

New Distribution system

Contribution margin per pound = Revenue per pound - Variable cost per pound

= 1.26 - 0.30

= 0.96

Answer to the question

Breakeven Point in Units or pounds

= Fixed cost / Contribution margin per unit

= 10,000 / 0.96

= 10,416.67 Pounds or ............... 10,417 Pounds

Breakeven point in dollars

= Breakeven point in pounds * revenue per pound

= 10416.67 * 1.26

= $ 13,125