Reference no: EM132462695

Problem - Leroy Lamb and his long-term personal friend, Bella Legga, have established a flourishing business selling lamb products at retail to several thousand customers from nearby Big City, Michigan. The customers gladly drive the short five miles to the lamb store, because the exquisite taste of the grain-fed lambs, whose fleece at one time was as white as snow, is beyond comparison. The lamb store, called Legga Lamb to Go sells the product for $8.00 per pound and purchases them at $3.00 per pound. Average weight per order is 5 pounds. Other variable selling costs, e.g. commissions, are 20 per cent of sales per pound and fixed costs are $780,000 annually.

In the five years that the lamb store has been in existence, their best year ever was selling 200,000 pounds in 2015; the worst year was 2012, when they sold 165,000 pounds.

Required -

1. Determine the gross profit per pound.

2. The break-even sales in dollars are ________.

3. Legga Lamb has a target profit of $122,000. Therefore, the sales needed to achieve this target profit are $_______ or ________ pounds of product.

4. Bella and Teddy are disagreeing on an important business concept. She would like to increase target profit to $150,000 annually. Tom is reluctant to go along with this because he does not feel that the break-even point should be moved that far to the right on the volume-cost-profit graph. Bella snaps back that he is confused with too much college education and graph analysis. They look at you, their financial advisor, for the resolution to this issue. Don't let them down.

5. Review your answer in part c. A new supplier has offered to be the exclusive supplier of lamb to Legga Lamb to Go for a 1 year period of time, under contract. Marilee's Lambs, Incorporated, a Kentucky company, would sell their lamb products to them for $2.75 per pound, quick-frozen and delivered, with the understanding that Legga Lamb would have to order a minimum of 70,000 pounds at regular intervals throughout the year, as needed. Comment on what Legga Lamb should do. Base your comments on calculations and come to a conclusion.