Question

Beta Company sells blouses in Washington, USA. Blouses are imported from Pakistan and are sold to customers in Washington at a profit. Salespersons are paid basic salary plus a decent commission of $5 on each sale made by them. Selling price and expense data is given below:

Selling price per blouse                                  $          73.00

Variable expenses per blouse:

            Invoice cost                                         $          25.00

            Sales commission                               $          5.00

Total Variable Expense:                                 $          $31.00

Annual fixed expenses:

            Rent                                                    $          $100,000

            Marketing                                           $          $175,000

            Salaries                                               $          $90,000

Total fixed expense                                        $          $365,000

Required:

1. Compute the break-even point in units and in dollars using the information given above.
2. What would be net operating income or loss if company sells 18,500 blouses in a year?
3. If the manager is paid a commission of $2 blouse (in addition to the salesperson’s commission), what will be the effect on company’s break-even point?
4. Refer to the original data. What will be the break-even point of the company if commission is entirely eliminated and salaries are increased by $100,000?
5. Discuss your observations on the bottom-line results and the break-even point as variable expenses are change versus when fixed expenses are changed.

[RN1]Should be $5 and not $14 See below where the amount is correct.

Answer 1

Solution to part (a): Computation of break even point in dollars and units

Break Even point In dollars = Total Fixed Expenses / Contribution margin ratio

Contribution margin ratio = Contribution / Sales

= (Sales price - Total Variable expense) / Sales

=( 73 - 30) / 73

= 43/73 = 58.90%

Break Even point In dollars = $ 365,000 / 58.90%

=$ 619,694.4

Break even point in Units = Total Fixed Expenses / Contribution per unit

= $ 365,000 / $43

= 8,489 units

Solution to part (b): Net operating income on sale of 18,500 units.

Sales (18,500 x $ 73)	$ 1,350,500
Less: Variable expenses (18,500 x $30)	$ 555,000
Contribution	$ 795,500
Less: Total Fixed expenses	$ 365,000
Net operating Income	$ 430,500

Solution to part (c) :

The payment of a commission of $ 2 to manager will increase variable expenses and decrease contribution margin. Now the variable expenses will be $ 32 ($30 + $2) per unit and contribution margin will be $ 41 ($ 73 – $ 32) per unit.

Break even point in Units = Total Fixed Expenses / Contribution per unit

= $ 365,000 / $41

= 8,903 units

Break Even point In dollars = Break even units x Sales price

= 8,903 units x $ 73

= $ 649,919

Solution to part (d):

Elimination of commision will reduce variable expense by $ 5 and total variable expense will be $ 25 . This will increase contribution per unit to $ 73 - $ 25 = $ 48 per unit. Increase in salaries by $ 100,000 will increase total fixed expenses to $ 465,000.

Break even point in Units = Total Fixed Expenses / Contribution per unit

= $ 465,000 / $48

= 9,688 units

Break Even point In dollars = Break even units x Sales price

= 9,688 units x $ 73

= $ 707,224.

Solution to part (e)

We can see in part (c) that when variable expenses are increased the change in break even point is less as compared to part (e) when the fixed expenses are increased.When salaries are increased by $ 100,000 and commision is totally eliminated, company needs to sell 9,688 units to break even as compared to 8,903 units when variable expense are increased. This shows that impact of increase in fixed expense is greater than that of increase in variable expense on the break even point.