RYT Candy Company Sold Lollipops Last Year

RYT Candy Company Sells Lollipopslast Year The Company Sold 1000000

RYT Candy Company manufactures and sells lollipops. Last year, the company sold 10,000,000 lollipops for total sales of $1,000,000. Variable costs associated with these sales amounted to $350,000, resulting in net profits of $100,000. Administration has now directed management to double profits in the upcoming year. The company is evaluating its product lines, with a focus on a specific location producing three flavors: Cherry, Lemon, and Blueberry. Further analysis shows that 20% of the cost of goods sold (COGS) and 30% of selling and administrative (S&A) expenses are variable costs. For the month of September, the company is considering discontinuing the Blueberry flavor, with the following data provided for each flavor:

  • Cherry: Sales $18,000; COGS $7,000; Gross Profit $11,000; S&A Expenses $7,000; Net Income $4,000
  • Lemon: Sales $26,000; COGS $?, Gross Profit $?, S&A Expenses $?, Net Income $?
  • Blueberry: Sales $9,000; COGS $?, Gross Profit $?, S&A Expenses $?, Net Income $?

Paper For Above instruction

The decision of whether RYT Candy Company should discontinue the Blueberry flavor hinges on a detailed analysis of the product's profitability, especially in terms of contribution margins, fixed costs, and how discontinuation might impact overall profitability. To arrive at an informed decision, it is vital to assess the variable and fixed costs associated with each product line, considering the company's goal to double profits in the coming year.

Analysis of the Current Financials

Given the overall sales, costs, and profits, the company's previous year’s data indicates that total sales were $1,000,000, with variable costs at $350,000. The net profit of $100,000 results in a profit margin of 10%. The goal is to evaluate whether eliminating Blueberry, which has sales of $9,000, could enhance overall profitability.

Variable Costs and Contribution Margin Analysis

The information specifies that 20% of COGS and 30% of S&A expenses are variable. Therefore, for each product, the variable costs and expenses can be estimated based on the sales figures provided.

For Blueberry, sales are $9,000:

  • Variable COGS = 20% of total COGS allocated to Blueberry (unknown for now, but can be approximated).
  • Variable S&A Expenses = 30% of S&A expenses allocated to Blueberry (unknown).

The key is to determine whether Blueberry's contribution margin covers its fixed costs and contributes positively to fixed expenses and net income.

Calculating Fixed and Variable Costs for Blueberry

Since total COGS and S&A costs are not given explicitly for Blueberry, assumptions are made based on company-wide ratios. Using overall ratios of variable costs to sales, we estimate that:

  • Variable COGS for Blueberry = 20% of product COGS
  • Variable S&A expenses = 30% of product S&A expenses

Assuming the total variable costs are evenly distributed across products proportionally to sales, Blueberry's contribution margin can be computed by subtracting estimated variable costs from sales.

Estimated variable costs associated with Blueberry:

  • Variable COGS ≈ (Sales of Blueberry / Total Sales) × Total COGS (unknown, but can be approximated based on existing data).
  • To simplify, we can analyze the contribution margin on sales directly, subtracting estimated variable costs based on ratios.

Decision Criterion

Discontinuing Blueberry should only be considered if the product's contribution margin is negative or less than the fixed costs it incurs, which do not contribute to overall profitability. If the product generates positive contribution margin after variable costs, it should likely be maintained, especially considering the goal to double profits.

Assessment of Blueberry’s Profitability

Using the data for Blueberry:

  • Sales: $9,000
  • Gross Profit: Data not directly provided, but can be estimated.
  • Net Income: Data not provided, but can be deduced.

Assuming the gross profit margin aligns proportionally with overall margins, Blueberry’s gross profit could be estimated at 61% of sales (since gross profit of $11,000 on $18,000 sales of Cherry indicates about 61%). This suggests gross profit for Blueberry is approximately $5,490 (61% of $9,000).

Subtracting estimated variable costs (20% of COGS, approximately 39% of gross profit), yields an estimate of contribution margin, which can be used to evaluate if the product covers fixed costs and adds to overall profit.

Conclusion and Recommendations

If Blueberry’s contribution margin is positive after variable costs and it contributes to covering fixed expenses, discontinuing it could reduce overall contribution and harm profitability, especially when the goal is to double profits. Conversely, if Blueberry’s contribution margin is minimal or negative after variable costs, discontinuation could be justified to eliminate unprofitable products.

Given the calculations and assumptions based on proportionate analysis, it appears that Blueberry is marginally profitable, contributing positively to fixed costs. Therefore, discontinuing Blueberry may not be advisable unless further detailed cost data indicates it is unprofitable.

In conclusion, the decision to discontinue Blueberry should be based on a thorough analysis of contribution margins and fixed costs. It is recommended to conduct a complete contribution margin analysis with exact variable and fixed costs to support this decision during strategic planning.

References

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