Problem - Jen and Berry Company produces butter pecan ice cream. The following operating data have been accumulated for 2013 to assist in making plans for 2014. The factory has a capacity of 80,000 cases annually. The company's after tax net income for 2013 is estimated to be $40,560 and the income tax rate is forty (40) percent.
Year 2013 Data
Per Case
Selling price $50.00
Variable costs:
Direct materials $24.00
Direct labor $ 3.00
Manufacturing overhead $ 8.00
Selling expenses $ 5.00
Annual fixed costs: Totals
Manufacturing overhead $375,500
Selling expenses $ 56,700
Administrative expenses $ 94,200
A. For the year 2013:
Calculate Jen & Berry Company's break-even point in number of cases.
Without using numbers or making any calculations, describe (in words only) three different ways in which Jen & Berry Company could lower the break-even point.
B. Management has reviewed costs and expenses for 2014 and estimates that the cost of cream will increase by $2.00 per case. Due to increased automation of the production line, the cost of direct labor will decrease by $.50 per case, but variable manufacturing overhead will increase 1.25 percent per case and fixed overhead will increase $30,000. All other costs and expenses are expected to remain at the same rates or levels as experienced in year 2013.
How many cases of butter pecan ice cream will Jen & Berry Company have to sell for $50.00 per case in year 2014 to earn the same after tax net income as in year 2013?
How much would Jen & Berry Company have to charge for one case of butter pecan ice cream to maintain the same contribution margin ratio in year 2014 as in year 2013?
C. In year 2014, Jen & Berry Company wants to expand its product line by introducing a new flavor, peppermint crunch. Expected operating data for this new flavor are as follows:
Selling price per case $45.00
Variable costs per case:
Direct materials $20.00
Direct labor $ 4.00
Manufacturing overhead $ 6.00
Selling expenses $ 7.00
Additional manufacturing facilities would be required and could be leased for $200,000 per year.
Fixed advertising costs would increase by $55,600 per year. Jen & Berry Company's marketing department has estimated that one case of peppermint crunch would be sold for every four cases of butter pecan sold.
If Jen & Berry Company does introduce the new flavor in year 2014 and also experiences the cost changes associated with butter pecan (as described in Requirement B), how many cases of butter pecan (with a selling price of $50.00 per case) and how many cases of peppermint crunch must the company sell to break even in year 2014?