Assignment:
You have been hired as a consultant for Wrigley a well-known and loved worldwide manufacturer of chewing gum. Three of these brands - Juicy Fruit®, Wrigley's Spearmint® and Altoids® - have heritages stretching back more than a century. Wrigley sells its products in more than 180 countries around the world.
The CEO of Wrigley, William Perez is in charge of a recent acquisition of a manufacturer of organic chewing gum, Natural Mint, Inc. which is located in Portland, Oregon. The company has one main product which is made in five flavors. He has asked you to prepare a preliminary cost-volume-profit analysis to determine whether changes should be made to the cost structure of selling expenditures.
The following information was presented for use in the analysis:
Fixed costs: Variable Costs (per unit):
Administrative Costs: $245,000 Direct Materials: $0.075
Selling Costs: $260,000 Direct Labor: $0.055
Fixed Overhead Costs: $230,000 Variable Overhead: $0.035
Variable Selling: $0.010
Selling price per unit: $2.00
Questions (each question is independent of the others):
Q1. What is the current break-even point in units and in dollars? Also compute the margin of safety.
Q2. Assume the company sold 500,000 packs of gum last year. What is Natural Mint’s operating leverage? If sales decreased 10%, by what % will Net Income decrease? Create a contribution margin income statement to prove that your calculations are correct.
Q3. What is the break-even point in units if variable selling costs are increased to 0.05 per unit? Would you recommend this change to the CEO if the expected sales level is 520,000 packages? Explain – consider the breakeven point and profit.
Q4. Independent of Question 3, what is the break-even point in dollars if the variable selling is eliminated and replaced with an increase to Fixed Selling costs of $200,000? Would you recommend this change to the CEO if the expected sales level is 550,000 units? Explain – consider the breakeven point margin of safety and profit.