Question

The manager of Walmart’s in Arkansas is considering the possibility of providing flower delivery service. She hires you as consultant for this project. You suggested that Walmart should do some marketing research to understand the market needs. Walmart has conducted a survey. The major findings include:  The estimated number of customers is 400.  An average customer is willing to buy $30 worth of flowers per order and pay $5 for delivery.  An average customer tends to place 10 flower orders per year. To ensure on-time delivery Walmart’s needs to invest $30,000 on a new van, which will be straight line depreciated over 10 years with $0 salvage value. The expenses of gas, repair, maintenance, and other operating costs incurred by this van will be $2,000 a year. Staff compensation will cost $50,000 a year. Advertising, promotion and other sales expenses will cost $10,000 a year. The average variable cost of flowers is 60% of the flower sales. There is no variable cost assigned to delivery. (4) Please answer the following questions 1. What is unit contribution (per customer per year)? 2. What is BEV in each year?

Answer 1

1.

estimated number of customers	400
average customer's purchase	35
average customer order per year	10
total sales in a year= 400*35*10=	$       140,000
variable cost= 60% of sales= 60%* 140000=	$         84,000
Contribution Margin = Sales - Variable cost
= 140000-84000
= 56000
Contribution per customer= Contribution / No. of customer
= 56000/400
= $140

2.

		Fixed or variable
New Van:
Cost	$       30,000
salvage value	$                -
Life expectancy	10 years
Depreciation	30000-0 /10
	=3000	Fixed
Operating cost per year	$         2,000	variable
staff cost	$       50,000	Fixed
sales expense	$       10,000	variable
Total fixed cost	2000+50000
	$       53,000

Break even Point ( sales dollar) :

BEV= Fixed cost / contribution

= 53000/56000

=0.95

and Break even Volume = Fixed cost / contribution per unit

Contribution per customer = 140

contribution margin per order= 140/10= 14

Fixed Cost= 53000

BEV= 53000/140

= 378.57

or 379

so 379 customers ordering 10 times per year will meet the BEP

Or

BEV per order= 53000/14

= 3785.71

or simply 3786

so a total of 3786 orders will meet the BEP for the year.