Question

Audubon Advisors is a volunteer student organization that uses business skills they’ve learned in their MBA program to advise local charity groups about business decisions. One charity group is planning to make and sell cutting boards at a major cooking show. The boards cost $6 each to make and will sell for $20 each. The boards will be made by volunteers at the show and all materials not used can be returned. That is, the group will make only the number of boards it can actually sell. The cooking show allows three options for groups selling at the show:

A. Pay a fixed booth fee of $5,600

B. Pay a fee of $3,800 plus 10% of all revenue from the boards sold at the show

C. Pay 25% of all revenues from boards sold at the show.

           

1. Compute the CM per board under each of the three options.

2. Compute the breakeven point in number of boards for each of the three options.

3. Which payment plan has the lowest risk of loss for the charity group? Why?

4. Which payment plan has the highest profit potential assuming that there is very high demand for the boards? Why?

Answer 1

Answer: 1and 2. The Contribution Margin (CM) per board and Break Even (Units) under each option is computed with the help of the marginal income statement as follows.

Marginal Income Statement Analysis
	Option- A	Option- B	Option- C
Selling Price per board	$20	$20	$20
Less: Marginal Cost	$6	$6	$6
Revenue Fees-0%, 10% and 25%	$0	$2	$5
1. CM per board (SP −VC)	$14	$12	$9
2. Break Even (in units)=Fixed Cost÷ CM	$5,600 ÷ $14 = 400 boards	$3,800 ÷$12= 316.67 boards	0 ÷$9 = 0 boards

Note: CM is calculated as follows: CM = selling Price (SP) per board − Variable Cost (VC) per borad

* In option A, Variable Cost is only making Cost of $6.

** In option B, Variable Costs are making Cost $6, plus10% of revenue i.e,10% of $20= $2; 6+2= $8

*** In option C, Variable Costs are making Cost $6, plus 25% of revenue i.e,25% of $20= $5; 6+5= $11

Fixed cost in option C is Zero.

3) Option C payment plan has the lowest risk of Loss for the charity group. Becasuse this option shares $11 out of $20 as marginal Cost per borad. There is No fixed Cost that is to be recovered. The BE is 0 units. after recovery of MC is the contribution become profit or income.It has selling price of $ 20 out of which $6 is making cost and 25% of SP $5 is to be shared. So total Variable cost is $11 and

3) Option A payment plan has highest profit potential because it has maximum CM per Board. Every board sold after reaching BE 400 board it will fetch more CM $14 in the form income when there is very high demand say 3000 board as comapred to otption B and C.