Homework SourseToy Box Inc is contemplating expanding sales of their childr
Toy Box Inc. is contemplating expanding sales of their children\'s toys. They have an opportunity to stock and sell the X toy that has been a big hit with children everywhere. They need to order the X toys from the manufacturer in a minimum order of 100 at a cost of $12 each. They can resell the X toy in their store for $22 each. Due to anticipated demand, Toy Box Inc. will need to hire an additional part-time cashier at $600 a month which will be classified as a fixed-cost attributable to the X toy. Also, they have offered a $1 sales commission per toy to their floor sales representative. They will also include a package of trading cards with every purchase of an X toy, which will cost them an additional $2 each. Required: To make the project worthwhile, Toy Box Inc. would need to achieve a $5,000 profit per month. What level of sales, in units and in dollars, would be required to reach this target profit? Show all computations completely in a table inserted into your document. Assume that the venture is undertaken and an order is placed for 100 X toys. What would be Toy Box\'s break-even point in units and in sales dollars? Show computations completely in an inserted table, and explain the reasoning behind your answer. You can ignore the fixed cost of $600 for this part. Assuming it would not affect sales, how would your answer to #2 change if the company did not offer the $2 trading cards as part of the deal?
Solution
Part 1
Calculation of Contribution Margin
Sale price of toy
$ 22.00
Less Costs
Purchase Price
$ 12.00
Sales Commission
$ 1.00
Trading Card Cost
$ 2.00
$ 15.00
Contribution
$ 7.00
To earn a profit of 5000 company will have to sell units that can cover variable cost of 15 per unit and fixed cost of 600.
Profit to be earned
$ 5,000.00
Fixed Cost
$ 600.00
Gross Receipts from sales
$ 5,600.00
No of units to earn 5600
(5600/7)
=
800 Units
Calculation of profit at sale of 800 Units
Sales revenue
(800*22)
17600
Less: Variable Cost
(800*15)
12000
Contribution
5600
Less : Fixed Cost
600
Net profit
5000
Sales in Dollars
$ 17,600.00
Sales in Units
800 Units
Part 2
Breakeven point =
Fixed cost/Contribution Margin
(600/7)
85.71 Units
Breakeven Units
or 86 Units (Approx)
Breakeven sales in Dollars (86*22)
$ 1,892.00
Part 3
If Fixed cost is ignored and variable cost is reduced by 2 dollars per toy
Breakeven sales unit will be zero since every sale will generate cash as fixed cost will not require to be recovered.
Notes :It is Assumed that fixed cost is ignored for the third part.
Alternate solution is also given for part 2 and 3 assuming Fixed cost is ignored for 2nd part only.
Part 2 Alternate Solution
Break even sales is a sale point at which fixed cost is fully recovered and company makes no profits and looses at breakeven point.
Breakeven =
Fixed cost/Contribution per unit
Breakeven =
0/7
0
There is no breakeven point in this situation
Part 3 Alternate Solution
If company did not offer trading cards Variable cost will reduce by 2 Dollars
New Variable cost
(15-2)
13
New Contribution margin
(7+2)
9
Breakeven point =
Fixed cost/Contribution Margin
(600/9)
66.66 Units
Breakeven Units
or 67 Units (Approx)
Breakeven sales in Dollars (67*22)
$ 1,474.00
| Part 1 | Calculation of Contribution Margin | ||||
| Sale price of toy | $ 22.00 | ||||
| Less Costs | |||||
| Purchase Price | $ 12.00 | ||||
| Sales Commission | $ 1.00 | ||||
| Trading Card Cost | $ 2.00 | $ 15.00 | |||
| Contribution | $ 7.00 | ||||
| To earn a profit of 5000 company will have to sell units that can cover variable cost of 15 per unit and fixed cost of 600. | |||||
| Profit to be earned | $ 5,000.00 | ||||
| Fixed Cost | $ 600.00 | ||||
| Gross Receipts from sales | $ 5,600.00 | ||||
| No of units to earn 5600 | (5600/7) | = | 800 Units | ||
| Calculation of profit at sale of 800 Units |
