You are a Consultant for the professional service firm.
Strong and Tastee Inc. manufactures a line of single-cup brewing machines for home and office use that brew a cup of coffee, tea, or hot chocolate in less than a minute. The machines use specially packaged portions of coffee, tea, or hot chocolate that can be purchased online directly from Strong and Tastee or at Starbucks coffee shops who are licensed to distribute the company's products. The appeal of the brewing machines is twofold. First, they offer a high level of convenience. The use of prepackaged coffee servings means no grinding of coffee beans and no mess. Also, the brewing machines have a water reservoir that for some models is large enough to make up to 20 cups of coffee. Second, the taste of each cup of coffee, tea, and hot chocolate is very consistent. The brewers' pressurized system uses the same amount of water for each cup and the airtight seal used in the individual portions keeps the product fresh.
Additional Information
The company has three models of brewers that offer different features, such as the size of the water reservoir, the number of brewing sizes, and the types of filtering devices used in the machine. Data from the most recent fiscal year for the three models is shown below.
|
Model
|
Model
|
Model
|
|
Home Brewer
|
Office Brewer
|
European Deluxe
|
|
Sales volume (units)
|
12,000
|
30,000
|
6,000
|
|
Unit selling price
|
$150
|
$200
|
$300
|
|
Variable cost per unit
|
120
|
140
|
180
|
|
Contribution margin per unit
|
$30
|
$60
|
$120
|
Fixed costs are $1,500,000 per year. The company has no work in process or finished goods inventories.
The company is facing increased levels of competition from manufacturers using similar brewing technologies and believes there is no room for any increases in unit selling prices.
Strong and Tastee Inc. is unsure of the strategies to take in order to increase profitability. The engagement partner would like the following questions on his desk by Monday morning:
Required:
1. Calculate the company's overall break-even point in sales dollars.
2. Calculate the sales dollars required for each product at the overall break-even level of sales calculated in (1) above.
3. Calculate the company's overall break-even point in total units.
4. What impact would doubling the number of Office Brewer units sold next year have on the overall break-even point in sales dollars? Assume that there will be no changes to the Home Brewer or
European Deluxe unit sales, that unit selling prices and variable costs will remain the same for each model, and that total fixed costs will be unchanged. 5. The company is considering a new advertising campaign to raise overall consumer awareness of the product offerings. The total cost of the year-long campaign would be $150,000. By how much would sales need to increase overall for the company to be able to justify the new campaign? Assume no change to the current product mix.
6. Suppose that instead of being designed to increase total sales volume, the new $150,000 advertising campaign will focus on getting customers who would have purchased the Office Brewer model to buy the European Deluxe model instead. To justify the cost of the new advertising, how many customers must purchase the European Deluxe model instead of the Office Basic model? Assume that the new advertising campaign will have no impact on sales of the Home Brewer model.
7. The company is considering adding a new product to its line of brewers targeted at the office use market (both the Office Brewer and European Deluxe are currently targeting office users). The new brewer, the Office Plus, would sell for $250 per unit and would have variable unit costs of $160.
Introducing the new model would increase fixed costs by $102,000 annually and would reduce annual unit sales of the Office Brewer and European Deluxe models by 10% each. Assuming no change to the sales of the Home Brewer model, how many units of the Office Plus would need to be sold to justify its addition to the product line next year?