Case Facts
Target Profit Units Following the successful launch of Lions Lager's limited-edition seasonal beer, "Autumn Amber," on August 1, the company is aiming to maximize profitability during its short sales window. They previously anticipated limiting the seasonal beer to 10,000 units, but believe there is market demand for additional units. Management has set an ambitious target of achieving operating income of $150,000 from the sale of the seasonal beer. Management believes this is a realistic goal, particularly after the outcome of the overhead allocation analysis led to more precise product costing through the utilization of the activity based costing system. As a result of the sale price analysis conducted, management made the decision to reduce the sales price of each bottle to $9.80 to increase pricing competitiveness in the market while still maintaining a generous 70% gross profit margin. The cost management team has also already conducted a cost behavior analysis for the budgeted costs of Autumn Amber for more accurate analysis. The results of this analysis are summarized in Table I below: Table I: Autumn Amber Cost Behavior Unit variable cost $ 3.72 Total fixed costs $ 20,000.00 Management wants to know how many units would need to be sold in order to meet their ambitious operating income goal of $150,000. Variance Analysis Of particular concern in achieving the desired profitability is the direct materials cost, as Autumn Amber relies on specially sourced ingredients. The budgeted and actual costs of direct materials for the month of August are summarized in Table II: Table II: Direct Materials Costs for August Description Estimated Actual Quantity 9,320 10,200 Unit variable cost $ 1.20 $ 1.60 Total fixed cost $ 3,000 $ 2,800 Preliminary conversations with production managers have revealed that the current direct materials supplier provides the highest quality materials, which is the source of the unique and bold flavor of the beer.