Question

Dazzle Jewelry Company is a new startup merchandising company with the goal of offering fine jewelry at reasonable prices. This goal has been made possible by securing manufactures that have agreed to offer wholesale prices to Dazzle Jewelry Company. Dazzle's jewelry supplier's act in good faith is based on the hopes that this will be a long term relationship, and Dazzle's orders will increase considerably with the next 18 months. However, in order for Dazzle Jewelry Company to achieve this it must increase its sales. Dazzle Jewelry company just completed its first month of operations, the brother/sister owned startup inventory includes fresh water pearls, sterling silver, stainless steel watches and quality stone pieces. Each of the inventory category includes earrings, necklaces, rings and bracelets, except the stainless steel watches. The average cost of earrings per unit is $10 with an average selling price of $55, 20 units have been sold. The average cost of the necklace is $15 with a selling price of $65, 25 units have been sold. The bracelets have an average cost of $12 and a selling price of $45, 15 units have been sold. The rings on an average sell for $35, but cost $11 per unit, 30 units have been sold. The stainless steel watches average cost per unit is $35 with a selling price average of $85, and 50 units have been sold. Dazzle Jewelry Company plans to start their business online before setting up a physical store location to keep their overhead cost low. However, since this is Dazzle Jewelry's first year of operations the owners have decided to employed your firm to help them determine how many jewelry units they need to sell in the current operating year to reach their targeted profit of $300,000. The owners realize that this information is vital in helping them develop their sales and marketing strategy. Dazzle Jewelry Company owners noted in a follow-up e-mail that fixed cost for the year totaled $76,320, however this cost is likely to increase in the coming months by 20% based on a marketing proposal that was submitted by Bosch Advertising. The owners also noted in the e-mail that fixed cost is the same amount each month.

Based on your analysis, how many units will Dazzle Jewelry need to break-even? What recommendation do you have for the owners related to break-even?

Answer 1

Break-even analysis :

	Earrings	Necklace	Bracelet	Ring	Watch
Selling price per Unit	$ 55	$ 65	$ 45	$ 35	$ 85
Variable Cost	20	15	12	11	35
Contribution Margin per Unit	$ 35	$ 50	$ 33	$ 24	$ 50
Units Sold	20	25	15	30	50

At break-even point, Total Contribution Margin = Total Fixed Cost

Let the break even number be Q.

Weighted Average Contribution Margin per unit = 35 x 20/140 + 50 x 25/140 + 33 x 15 / 140 + 24 x 30 /140 + 50 x 50 / 140 = 5 + 8.9286 + 3.5357 + 5.1429 + 17.8571 = 40.4643

40.4643 Q = $ (76,320 + 20%) / 12

or Q = 7,632 / 40.4643

or 188.61 units or 189 units.

Earrings : 189 x 20/140 : 27 units

Necklace: 25 / 140 x 189 = 33.75 units

Bracelet : 15/ 140 x 189 = 20.25 units

Ring: 30 / 140 x 189 = 40.50 units

Watch : 50 / 140 x 189 = 67.50 units

Recommendations: All the five items are lagging behind the breakeven sales in units as computed above. Therefore, an aggressive marketing strategy should be adpted to increase unit sales of each item,

Number of jewellery units that are needed to be sold in current operating year to earn a profit of $ 300,000 = $ ( 76,320 + 300,000) / 40.4643 = 9,300 units.

Earrings : 20 / 140 x 9,300 = 1,328.57 units.

Necklace : 25 / 140 x 9,300 = 1,660.71 units

Bracelet : 15 / 140 x 9,300 = 996.43 units

Rings: 30 / 140 x 9,300 = 1,992.86 units

Watches : 50/140 x 9,300 = 3,321.43 units

Total contribution margin = $ 35 x 1,328.57 + $ 50 x 1,660.71 + $ 33 x 996.43 + $ 24 x 1,992.86 + $ 50 x 3,321.43 = $ 46,500 + $ 83,035 +$ 32,882.19 +$ 47,828.64 + $166,071.50 = $ 376,317.33

Profit = $ 376,318 - $ 76,320 = $ 300,000 approx.