Question

Sue Bee Honey is one of the largest processors of its product for the retail market. Assume that one of its plants has annual fixed costs total $8,000,000, of which $3,000,000 is for administrative and selling efforts. Sales are anticipated to be 800,000 cases a year. Variable costs for processing are $40 per case, and variable selling expenses are 25 percent of the selling price. There are no variable administrative expenses.
Required

If the company desires a profit of $5,000,000. what is the selling price per case?

Answer 1

Answer:

The selling price per case is $75

Explanation:

Sue Bee Honey

Profit is a function of how well a company is able to absorb/cover its costs of doing business.

Thus, to derive Profit we will consider this format;

Sales = xx

Less Variable costs = x

Contribution = xx

Less Fixed Costs = x

gross Profit = xx

Less selling & Admin expense x

Profit = x

Assume sales which is unknown is a

Sales = a

Less Variable costs = 40 x 800,000 = $32,000,000...,.(b)

Contribution = a minus b ..... (C)

Less Fixed Costs = $5,000,000....(d)

gross Profit = c - d.....….(e)

Less fixed selling & Admin expense = $3,000,000.......(f)

Less Variable selling expense = 25% x (a)...…g

Profit = $5,000,000

Stretching this out in a mathematical format.

5,000,000 + 3,000,000 + 5,000,000 + 32,000,000 = a - 25% of a = 0.75a

$45,000,000 = 0.75a

a = Sales = 45,000,000/0.75 = $60,000,000

To derive selling Price:

Divide sales by sales units = $60,000,000 / 800,000 = $75 per unit

Answer 2

Answer:

$75 per case

Explanation:

Required: Selling Price per case

Sales – Variable cost – Fixed cost = Target desired profit

Sales = 800000 case x Selling Price (SP)

Variable cost = (800000 case x $40) + (800000 x SP x 25%)

Putting into equation:

Sales – Variable cost – Fixed cost = Target desired profit

(800000 x SP) – [(800000 x 40) + (800000 x SP x 25%)] - $8000000 = $ 5000000

>800000SP – (32000000 + 200000SP) – 8000000 = 5000000

>800000SP – 32000000 – 200000SP – 8000000 = 5000000

>800000SP – 200000SP = 5000000 + 8000000 + 32000000

>600000SP = 45000000

>SP = 45000000 / 600000

>SP = $ 75