Question

Break-Even Sales

BeerBev, Inc., reported the following operating information for a recent year (in millions):

Sales $6,512
Cost of goods sold $1,628
Gross profit $4,884
Marketing, general, and admin. expenses 592
Income from operations $ 4,292

Assume that BeerBev sold 37 million barrels of beer during the year, that variable costs were 75% of the cost of goods sold and 50% of marketing, general and administration expenses, and that the remaining costs are fixed. For the following year, assume that BeerBev expects pricing, variable costs per barrel, and fixed costs to remain constant, except that new distribution and general office facilities are expected to increase fixed costs by $21.09 million.

a. Compute the break-even sales (in barrels) for the current year. Round your answer to two decimal places. Enter your answers in millions.

Answer 1

Explanation:

To compute the break-even sales (in barrels) for the current year, we need to first determine the contribution margin per barrel, which is the amount left over from the selling price of each barrel of beer after variable costs are subtracted.

Variable costs per barrel can be calculated as 75% of the cost of goods sold per barrel, which is:

Variable cost per barrel = (75% x Cost of goods sold) / Barrels sold

Variable cost per barrel = (0.75 x $1,628 million) / 37 million barrels

Variable cost per barrel = $33.00

Similarly, the variable marketing, general, and administration expenses per barrel can be calculated as:

Variable marketing, general, and administration expenses per barrel = (50% x Marketing, general, and administration expenses) / Barrels sold

Variable marketing, general, and administration expenses per barrel = (0.50 x $592 million) / 37 million barrels

Variable marketing, general, and administration expenses per barrel = $8.00

Therefore, the contribution margin per barrel is:

Contribution margin per barrel = Selling price per barrel - Variable costs per barrel

Contribution margin per barrel = $6,512 million / 37 million barrels - $33.00 - $8.00

Contribution margin per barrel = $98.00

To compute the break-even sales (in barrels) for the current year, we can use the following formula:

Break-even sales (in barrels) = Fixed costs / Contribution margin per barrel

Fixed costs can be calculated as:

Fixed costs = Income from operations + Variable marketing, general, and administration expenses x Barrels sold - Contribution margin per barrel x Barrels sold

Fixed costs = $4,292 million + $8.00 x 37 million barrels - $98.00 x 37 million barrels

Fixed costs = $1,108 million

Substituting this into the formula, we get:

Break-even sales (in barrels) = $1,108 million / $98.00 per barrel

Break-even sales (in barrels) = 11.29 million barrels

Rounding this to two decimal places and converting to millions, we get:

Break-even sales (in barrels) = 11.29 million barrels = 11.3 million barrels (rounded)