Question Foods Inc FI sells 5 million units per year of its

Question: Foods Inc (FI) sells 5 million units per year of its only product (SuperFood) through a major retailer. SuperFoods’ retail price is $5 per unit which included a margin to the retailer of 20%. SuperFoods’ manufacturing cost is $2 per unit. In order to promote sales, FI pays a sales broker 5% of the retail price of each unit sold. FI spends $3,800,000 per year in fixed costs (i.e. advertising, administrative costs and rent of the production facility).

1)Calculate SuperFoods’ per unit variable cost

2)Calculate SuperFoods’ unit contribution

3)Calculate SuperFoods’s Break Even Volume

4)Compare the BEV calculated above with the actual sales of SuperFood. Is FI making a profit? Why?

Solution

1. SuperFoods per unit variable cost= 2+ 0.2 X5 + 0.05 X 5=3.25

2. Unit Contribution= 5-3.25=1.75

3. 3.8+3.25V=5V which implies V =3.8/1.75= 2.17M which is the breakeven volume

4. Actual sales are more than Break even volume. So FI is making profit