Problem:
Scarborough Confectionery Company is a wholesale distributor of boxes of chocolates. The company services grocery, convenience and drug stores in the Toronto area.
Existing Situation:
Small but steady growth in sales has been achieved by the company over the past years while candy prices have been increasing. The company is formulating its plans for the coming year. Presented below are the data used to project the current year's after-tax net income of $270,000.
Average selling price per box $5.50
Average variable costs per box:
Cost of candy 2.50
Selling expenses 0.50
Total 3.00
Annual fixed costs:
Selling 200,000
Administrative 350,000
Total 550,000
Expected annual sales volume (400,000) 1,950,000
Tax rate 40%
Projected Situation:
Manufacturers of chocolate have announced that they will increase prices of their products an average of 15% in the coming year, owing to increases in raw materials (sugar, cocoa, peanuts, etc) and labor costs. Scarborough Confectionary Company expects that all other costs will remain at the same rates or levels as in current year.
REQUIRED:
1. What is the break-even point in boxes of candy for the company under the existing situation?
2. What selling price per box must the company charge to cover the 15% increase in the cost of the raw materials i.e., candy, and still maintain the current contribution margin ratio.
3. What volume of sales in dollars must Friendly achieve in the coming year to maintain the same net income after taxes projected for the current year if the selling price of candy remains at $5.5 per box and the cost of raw materials increases 15%?
4. What strategies might the company use to maintain the same net income after taxes as projected for the current year?