Recommendation
The Smith Syrup Company right now is not running efficiently enough to cover monthly overhead and expenses. The contribution and contribution margin are too low to generate the kind of profits needed to cover the bank loan and production costs. As you can see in Appendix A, the price per gallon comes out to $3.33 per gallon, and $.42 per 16 oz bottle. What needs to happen is the price per gallon has to increase by a dollar in which the price per bottle will also increase as shown in Appendix E. The Smith Syrup Company should continue productions until all debts are paid off, and discontinue production because the business isn’t efficient enough. As shown in Appendix B, the current price per gallon is broken down into price per bottle; Mr. Smith will have to sell his gallons 8 times its current sales volume, just to break even on the bank loan. As shown in Appendix C, Mr. Smith will have to sell 2 times its current gallon sales volume, to cover the monthly bank payment and production costs. Not efficient enough.
With the increase in price per gallon, as shown in Appendix E, the contribution and contribution margin will increase as shown in Appendix H, making Mr. Smith’s product more profitable. Appendix E shows us the increase of the price per gallon; Appendix E also shows us that with the dollar increase of price per gallon, the amount of gallons Mr. Smith has to sell is going to decrease by 43% to pay off the bank loan. There will also be a 43% decrease in the amount of gallons that has to be sold on a monthly basis to cover the bank payment and production costs. The decrease is illustrated in Appendix I & Appendix J. The increase in price per gallon will also decrease the amount of monthly sales needed to cover the bank loan and production costs. The amount of sales needed will decrease by 27% on a yearly and monthly basis, as shown in Appendix