Task: Variable Cost to Break Even
General Mills makes Wheaties, Cheerios, Betty Crocker cake mixes, and many other food products. Suppose the product manager of a new General Mills cereal has determined that the appropriate wholesale price for a carton of the cereal is $48.
Fixed costs of the production and marketing of the cereal is $15 million.
1. The product manager estimates that she can sell 800,000 cartons at the $48 price.
What is the largest variable cost per carton that General Mills can pay and still achieve a profit of $1 million?
2. Suppose the variable cost is $30 per carton. What profit (or loss) would General Mills expect?
Eastman Kodak Company is a provider of imaging technology products and services to the photographic, graphic communications, and health-care markets. A condensed 2005 income statement follows (in millions
Sales $14,268
Cost of goods sold 10,617
Gross margin 3,651
Other operating expenses 4,417
Loss from continuing operations (766)
Assume that $2,400 million of the cost of goods sold is a fixed cost representing depreciation and other production costs that do not change with the volume of production. In addition, $3000 million of the other operating expenses is fixed.
1. Compute the total contribution margin for 2005 and the contribution margin percentage. Explain why the contribution margin differs from the gross margin.