Question

Problem 1 SG operates a booth at a local mall, selling watches. Current monthly sales revenue is $24,000 with total variable costs (wholesale cost of watches) of $9,000. SG currently pays $2,000 a month to rent the space and pays two full-time employees to each work 160 hours a month at $15 per hour. The manager is paid a monthly salary of $4,000.

1.Calculate how much sales revenue SG needs to break even.

2.If SG wants to earn an operating income of $6,300 per month, then how much sales revenue does it need to generate? 3.Calculate operating income if SG achieves sales revenue of $30,000.

4.Assume SG can choose to pay rent at a rate of 10 percent of revenue. Note that this option would lower the CM ratio by 0.10 and lower fixed costs by $2,000 per month. SG can choose to pay rent either 1) as 10% of its revenue, or 2) as a monthly payment of $2,000. At what sales levels would SG prefer to pay a fixed amount of monthly rent (i.e., $2,000 per month), and at what sales levels would SG prefer to pay 10% of its monthly revenue as rent?

Answer 1

Current Position:

Ans-1

Breakeven Sales means the point where Contribution Margin equal Fixed Costs.

Formula :

Breakeven Sales = Fixed Cost / Contribution Margin %

Contribution Margin % = 15000/24000 = 62.5%

Therefore Breakeven Sales = 10800/62.5% = 17280

Ans-2

Sales for Target Income of 6300 = (Fixed Cost+Target Income)/(Contribution Margin %)

or (10800+6300)/(62.5 %) ,

or 17100 / 62.5%

or 27360

Ans-3

Ans-4

Upto Sales Revenue levels of 20000 he should opt to pay as a variable i.e. 10% of Sales.As any Sales level under 20000 will lead to lower cost as compared to Fixed 2000 as 10% * 20000 = 2000.This sales level is the lilmit.At 20000 level cost will be same under both the options.

Once the Sales Revenue crosses 20000 he should switch to Fixed model or else he would be paying more.