Mountain Bagels bakes and sells authentic New York style kettle-boiled bagels. For the most recent year, Mountain Bagels sold 250,000 bagels at a selling price of $1 per bagel. During this same year, Mountain Bagels incurred fixed costs of $100,000 and variable costs of $0.40 per bagel.
Management of Mountain Bagels is considering extending their product line to include bagel sandwiches. Management estimates that adding bagel sandwiches would increase their total fixed costs by $25,000 per year and that the variable cost per bagel sandwich would be $1.80.
REQUIRED:
a. Ignoring the new product line, how does Mountain Bagels' profit increase or decrease with the number of bagels sold? What was Mountain Bagels' profit for the most recent year?
b. How would adding bagel sandwiches change Mountain Bagels' profit? What information would you need before you can determine how introducing bagel sandwiches would affect Mountain Bagels' overall profit? Is it reasonable to assume Mountain Bagels will still sell 250,000 bagels?
c. Assume Mountain Bagels believes that, in addition to selling 250,000 bagels in the coming year, it can sell 25,000 bagel sandwiches. What price should Mountain Bagels charge per bagel sandwich if it wishes to increase overall profit by $50,000?
d. Assume Mountain Bagels believes that it can sell 25,000 bagel sandwiches at $4.50 but that this will reduce the number of bagels sold by 25,000 to 225,000 (i.e., there is a one-for-one tradeoff between bagels and bagel sandwiches). Assuming this sales mix remains constant, what is the break even point in sales dollars and units for each product?