Question

Mission Foods produces two flavors of tacos—chicken and fish—with the following characteristics.

Chicken Fish
Selling price per taco $ 3.90 $ 5.30
Variable cost per taco 1.95 2.65
Expected sales (tacos) 201,000 303,000


The total fixed costs for the company are $107,000.



Required:

a. What is the anticipated level of profits for the expected sales volumes?

b. Assuming that the product mix would be 42 percent chicken and 58 percent fish at the break-even point, compute the break-even volume using weighted-average contribution margin.

c. If the product sales mix were to change to four chicken tacos for each fish taco, what would be the new break-even volume?

Answer 1

a. To calculate the anticipated level of profits, we need to calculate the total revenue and total variable costs for each product, and then subtract the total variable costs and fixed costs from the total revenue.

Chicken:

Total revenue = $3.90 x 201,000 = $783,900

Total variable costs = $1.95 x 201,000 = $392,295

Contribution margin = $391,605

Fish:

Total revenue = $5.30 x 303,000 = $1,607,900

Total variable costs = $2.65 x 303,000 = $803,295

Contribution margin = $804,605

Total contribution margin = $391,605 + $804,605 = $1,196,210

Total fixed costs = $107,000

Anticipated profits = Total contribution margin - Total fixed costs = $1,196,210 - $107,000 = $1,089,210

b. Weighted-average contribution margin = (0.42 x $1.95) + (0.58 x $2.65) = $2.36

Break-even volume = Total fixed costs ÷ Weighted-average contribution margin = $107,000 ÷ $2.36 = 45,339 tacos

c. If the product sales mix changes to four chicken tacos for each fish taco, then the new product mix is 80% chicken and 20% fish.

Weighted-average contribution margin = (0.80 x $1.95) + (0.20 x $2.65) = $2.06

Break-even volume = Total fixed costs ÷ Weighted-average contribution margin = $107,000 ÷ $2.06 = 51,942 tacos