Cricket Company produces many different types of pet toys. You have been hired as a cost accountant to do some basic cost analysis on several of their new products. It is also your responsibility to communicate your findings to a few of the people on the management team. Assume this team has no accounting experience.
Cricket Company is considering the purchase of a new machine. This machine will produce two different kinds of floating dog toys used in retrieving exercises. The machine costs $5,000 and is the only fixed cost associated with the toys. Toy A will sell for $28 and has a variable cost of $18. Toy B will sell for $20 and has a variable cost of $5.
1. What is the breakeven in units and dollars if Toy A is the only one produced?
2. What is the breakeven in units and dollars if Toy B is the only one produced?
3. If the company only produces Toy A and targets a profit of $10,000, how many units do they need to sell?
4. Write a short memo to the management team explaining the meaning of break-even analysis. Include contribution margin and illustrate that concept with an example using numbers.