Julie James is opening a lemonade stand.

She believes the fixed cost per week of running

the stand is $50.00. Her best guess is that she can sell 300 cups per week at $0.50 per cup.
The variable cost of producing a cup of lemonade is $0.20. (P-35).
a. Given her other assumptions, what level of sales volume will enable Julie to break even?
b. Given her other assumptions, discuss how a change in sales volume affects profit.
c. Given her other assumptions, discuss how a change in sales volume and variable cost
jointly affect profit.

Ans: Fixed cost = $50

Sales expected = 300 cups

Selling price= P = 0.5

Variable cost= V= 0.2

Contribution per cup = P-V = 0.5-0.2= $0.3

A: Break-even sales= Fixed cost/ contribution

= $50/ $0.3

= 166.67 cups rounded off to 167 cups

B: Sales growth will result in higher contributions per unit. The total profits will rise if the fixed
costs stay the same. Therefore, an increase of 1 cup in sales will result in an increase of $0.3 in
earnings. In the same way, a drop in sales will result in a $0.3 drop in profit.

C: Increased profits will grow by the amount of the additional contribution per unit returned by
the higher sales when variable costs and selling price are both increased while keeping the
selling price constant.

Suppose sales increase while variable costs decrease. The higher contribution per unit will also
increase profitability. * An increase in sales.

If variable costs rise but remain below the selling price due to falling sales, the profit will drop
by the new contribution per unit multiplied by the falling sales.

Sales could decline because of falling variable expenses; in this case, profit would be reduced by
the ratio of the new contribution per unit to the decline in sales.