Question

Calculate the break-even sales revenue and units for the 500 mL bottle and the proposed 2L bottle. Calculate the net profit for the sales target of 10,000, 12,500 and 15,000 units of each product size. What do you recommend that Kai should do with his product line? Stick to 500 mL only? Add 2L as new size? Other suggestions? Do you agree with the online promotional and distribution strategy Kai is considering?

Selling Price               $9.00 – 500 mL           $16.00 – 2L

Variable Costs - Costs Per Bottle

Ingredients                  $1.50                           $3.00

Bottle/label                    .50                           1.00

                                    $2.00                           $4.00

Annual Fixed Costs

Labour

(2x $14 x 40 x 52)       $58,240

Rent                            15,000

Promotion                     5,000

Occupancy costs             6,000

Total Fixed Costs        $84,240                      

Answer 1

For calculating break-even sales revenue we use the formula fixed cost/contribution margin and for break-even points units we use fixed costs/(selling price/unit-variable costs/unit). The solutions for 1st 2 parts are given in the images...

we see that if target units is 10000 then net profit from only 2L bottles would have been $35760 whereas Kai has to sell a minimum of 12034 units(break-even) of 500 mL only break even.

Also the break-even point units for 2L bottles is much lesser ,7020. So considering the these two facts , it would be suggested that Kai should add 2L bottles to the product line.

If the online promotion of products results in achieving the target(at least 10000) for each of the product size) then the strategy will be useful.