Question

Problem 1: The Glen Stein Shop sells steins from all parts of the world. The owner of the shop, John Glen, is thinking of expanding his operations by hiring local college students, on a commission basis, to sell steins at the local college. The steins will bear the school emblem.

These steins must be ordered from the manufacturer three months in advance, and because of the unique emblem of each college, they cannot be returned. The steins would cost Mr. Glen $15 each with a minimum order of 200 steins. Any additional steins would have to be ordered in increments of 50.

Since Mr. Glen’s plan would not require any additional facilities, the only costs associated with the project would be the cost of the steins and the costs of sales commissions. The selling price of the steins would be $30 each. Mr. Glen would pay students a commission of $6 for each stein sold.

Required:

1. To make the project worthwhile in terms of his own time, Mr. Glen would require a $7’200 profit for the first six months of the venture. What level of sales in units and dollars would be required to meet this target net income figure? Show all computations.

2. Assume that the venture is undertaken and an order is placed for 200 steins. What would be Mr. Glen’s break-even point in units and in sales dollars? Show computations, and explain the reasoning behind your answer.

Answer 1

1)   to make a profit of $ 7,200 , 800 units of glen to be sold at $ 24,000.00

Given, Sale price per unit 30$

Purchase price15$

Commission 6$

Total variable cost   = purchase price + commission

                          = 15 + 6

                          =$ 24

Contribution per unit   = Sale price - Variable cost

                                   = 30   -24

                                   = 9$

Profit required is $7,200 for first 6 months,

Qty to be sold for this profit     =    Desired Profit / Contribution per unit

                                                  =     7200   /   9

                                                  = 800 units

Sales value of 800 units            = $ 24,000.00      ( units X sale price = 800 X 30)

2) Break even units 125    and Break even sales $ 3750

Break even point =   Fixed Cost / Contribution per unit

However, there is no fixed cost per se involved in this case. the very first piece of Glen sold would result in a profit, thus making the BEP as zero.

However, considering that the minimum order to be placed for the Steins is 200 units, the store wont break even until it had recovered this Purchase Cost. The purchase cost at $15 per unit works out to $ 3000 ( 200 X 15)

so   BEP in units =    Purchase cost to recover / ( Sale price per unit - Commission to students)

                           =    3000   /   ( 30 - 6 )

                          =   3000 / 24

                           = 125 units.

Sales in $ at 125 units   =      $ 3,750 ( 125 X 30)