Making Decisions With a Linear Profit Model

How much is the business paying out versus how much it is taking in? When approaching decisions from a linear profit model, the total costs of your expenses versus the profit you bring in helps decision makers determine the viability of potential options. Think about your personal budget: If you make x amount of money from your job (your “take in”) and you want to add a new or different expense into your finances (what you “pay out”), a linear profit model can help calculate the feasibility of this option.

To prepare for this Assignment, consider how calculations are an essential asset to decision making, especially when using alinear profitmodel. Think about how a difference in calculation can impact a short-term decision or major change in a business.

For this week’s Assignment, you examine cost behaviors and decision-making scenarios using the linear profit model. You then write 1–2 pages on each, looking at the presented finances and providing recommendations on potential improvements.

Part 1

Baker Consolidated

Baker Consolidated operates a cafeteria for its employees. The operation of the cafeteria requires fixed costs of $4,700 per month and variable costs of 40% of sales. Cafeteria sales are currently averaging $12,000 per month.

Baker has an opportunity to replace the cafeteria with vending machines. Gross customer spending at the vending machines is estimated to be 40% greater than current sales, because the machines are available at all hours. By replacing the cafeteria with vending machines, Baker would receive 16% of gross customer spending and avoid all cafeteria costs. In a poll, employees did not express a preference for one option over the other.

In a 1- to 2-page document, explain the impact of this decision. Be sure to address the following:

  • How much does monthly operating income change if Baker Consolidated replaces the cafeteria with vending machines? Explain using linear profit modeling calculations.
  • What recommendation would you make for Baker Consolidated’s managers considering this decision? Justify your response.

Part 2

Barnwell Brothers Company

Data for the Barnwell Brothers Company are as follows:

Sales (100,000 units) $500,000
Costs Fixed Variable
Raw material $ 0 $150,000
Direct labor $0 $100,000
Factory costs $50,000 $75,000
Selling and administrative costs $55,000 $25,000
Total costs $105,000 $350,000 $455,000
Operating income $45,000

In a 1- to 2-page document, address the following based on the provided company cost data:

  • What is the break-even sales in units?
  • If Barnwell Brothers is subject to an effective income tax rate of 40%, how many units would Barnwell Brothers have to sell to earn an after-tax profit of $90,000?
  • If fixed costs increase $31,500 with no other cost or revenue factors changing, what is the break-even sales in units?
  • How would these calculations affect decision making for managers at Barnwell Brothers? Why?
  • What recommendation(s) would you suggest for reducing costs at Barnwell Brothers? Justify your recommendations using linear profit modeling.

Part 3

Vino Bella Cellars

Vino Bella Cellars manufactures a 1,000-bottle wine storage system that maintains optimum temperature (55–57 °F) and humidity (50–80%) for aging wines. The following table depicts how average cost varies with the number of units manufactured and sold (per month):

Quantity Average Cost
1 $ 6,000
2 $ 5,000
3 $ 4,300
4 $ 3,850
5 $ 3,550
6 $ 3,550
7 $ 3,657
8 $ 3,925
9 $ 4,300
10 $ 4,800


In a 1- to 2-page document, address the following:

  • What is the defined difference between average cost and marginal cost?
  • Vino Bella Cellars sells the units for $4,500 each. This price does not vary with the number of units sold. How many units should Vino Bella Cellars manufacture and sell each month?
  • Should Vino Bella Cellars charge more for different quantities of units? Why or why not?
  • What recommendation would you make to the owners to increase their profits on this product? Explain the role of linear profit modeling within your recommendation.

Submit your 3- to 6-page Assignment by Day 7 of this week.