Question

In: Accounting

Wally’s Widget World is an online retailer that makes and sells widgets. There are three models...

Wally’s Widget World is an online retailer that makes and sells widgets. There are three models of widgets, each with its own cost of materials and labor.

Model	Percent of sales	Materials cost	Labor cost	Selling price
Econowidget – base-level widget for the budget-conscious widget user	35%	$3.50	$1.50	$6.99
Superwidget – adds additional feature for the more demanding widget user	45%	$4.00	$1.75	$8.99
Widget Supreme – for the more discerning and sophisticated widget user	20%	$5.25	$2.00	$11.99

The widgets are all the same size and approximate weight, so shipping costs for each widget (regardless of model) are $2.50, and customers are charged $3.99 per widget. Wally’s Widget World has monthly costs below:

Rent                   $10,000
Utilities              2,000
Administrative salaries     6,000
Overhead/supplies      1,000

In addition, Wally’s budgets $3,000 each month on banner ads and search-engine marketing. Assuming the percentage of sales for each product in the product line remains constant, perform the following analyses:

Calculate the break-even volume

Calculate the break-even revenue

Wally’s Widget World has a monthly target profit of $5,000. What should be the target volume and revenue for this objective?

Is this a viable target profit? Explain using your calculations. Give an example of another target profit that you think would work and explain why

Expert Solution

Particulars	Econowidget	Superwidget	Widget supreme
Selling price	6.99	8.99	11.99
Add:Shipping charges	3.99	3.99	3.99
Total	10.98	12.98	15.98
Less:
Shipping cost	2.5	2.5	2.5
Material cost	3.5	4	5.25
Labour cost	1.5	1.75	2
Contribution	3.48	4.73	6.23
PV Ratio = contribution/Selling price	31.7	36.4	39.0
Percent of sales	35%	45%	20%
Combined PV Ratio	11.1	16.4	7.8
Total PV Ratio	(11.1+16.4+7.8)	35.3

Total fixed cost

Rent 10000

Utilities 2000

Administrative salary 6000

Total fixed cost 18000

Break even Revenue =Fixed cost/Combined PV Ratio
(18000/35.3%)
50992
Break even Volume
		Break even volume per each widget
Econowidget 35%	(50992*35%)/10.98	1625
Superwidget 45%	(50992*45%)/12.98	1768
Widget supreme 20%	(50992*20%)/15.98	638

Target volume and revenue if there is 5000 profit
Revenue =Fixed cost+Profit/Combined PV Ratio
(18000+5000/35.3%)
65156
Volume
		volume per each widget
Econowidget 35%	(65156*35%)/10.98	2077
Superwidget 45%	(65156*45%)/12.98	2259
Widget supreme 20%	(65156*20%)/15.98	815

Profit	5000
Less:Banner advertisement	3000
Less:Overhead	1000
Balance profit	1000

Therefore the profit or 5000 is viable

ekkarill92 answered 2 years ago

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