Question

In: Accounting

Problem 1 SG operates a booth at a local mall, selling watches. Current monthly sales revenue...

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.

Required (Show your work):

  1. Calculate how much sales revenue SG needs to break even (10 points)
  2. If SG wants to earn an operating income of $6,300 per month, then how much sales revenue does it need to generate? (5 points)
  3. Calculate operating income if SG achieves sales revenue of $30,000. (5 points)
  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? (5 points)

Solutions

Expert Solution

Sales Revenue - $24,000

Variable expenses - $9,000

Fixed cost exepense = Rent + Emplyees wage + Salary of manager

2,000 + (2x160x15) + 4,000 = $10,800

Contribution = Sales - Variable cost

24,000 - 9,000 = $15,000

Contribution margin ratio = Contribution / sales

15,000/24,000 = 62.5%

Sales to Break even :

Break even in sales = Fixed Cost / Contribution margin ratio

10,800/62.5% = $17,280

Sales with a target income of $6,300

Sales with a target income = (Fixed cost + target income) / Contribution margin ratio

(10,800 + 6300) / 62,5% = $27,360

Operating income when sales revenue is $30,000

Since sales and contribution moves in the same proportion, the contribution margin ratio will remain the same as above. So using the above formula we can solve for x

Sales with a target income = (Fixed cost + target income) / Contribution margin ratio

Here, target income is taken as x.

30,000 = (10,800 + x) / 62.5%

30,000 x 62.5% = 10,800 + x

18,750 - 10,800 = x

x = 7,950

Thus operating income gained is $7,950 when sales revenue is $30,000.

Contribution margin ratio is reduced by .10 or 10% which gives us 52.5%

Fixed cost reduced by $2000 which gives us $8,800

Sales level at which monthly payment of rent is prefered.

Break even in sales = Fixed Cost / Contribution margin ratio

(8800 + 2000) / 52.5% = $20,571

Sales level at which 10% of revenue is prefered as rent.

Break even in sales = Fixed Cost / Contribution margin ratio

[8,800 + (10% x 24,000)] / 52.5% = $21,333


Related Solutions

Problem 1 SG operates a booth at a local mall, selling watches. Current monthly sales revenue...
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...
Rita Jekyll operates a sales booth in computer software trade shows, selling an accounting software package,...
Rita Jekyll operates a sales booth in computer software trade shows, selling an accounting software package, Abacus. She purchases the package from a software company for $165 each. Booth space at the convention hall costs $13,000 per show. Required a. Sales at past trade shows have ranged between 400 and 600 software packages per show. Determine the average cost of sales per unit if Ms. Jekyll sells 400, 450, 500, 550, or 600 units of Abacus at a trade show....
Problem 1-20A (Algo) Product versus selling, general, and administrative (SG&A) costs LO 1-2, 1-3 Campbell Manufacturing...
Problem 1-20A (Algo) Product versus selling, general, and administrative (SG&A) costs LO 1-2, 1-3 Campbell Manufacturing Company was started on January 1, year 1, when it acquired $85,000 cash by issuing common stock. Campbell immediately purchased office furniture and manufacturing equipment costing $9,100 and $35,100, respectively. The office furniture had an eight-year useful life and a zero salvage value. The manufacturing equipment had a $3,900 salvage value and an expected useful life of four years. The company paid $11,500 for...
Problem 1-20A (Algo) Product versus selling, general, and administrative (SG&A) costs LO 1-2, 1-3 Finch Manufacturing...
Problem 1-20A (Algo) Product versus selling, general, and administrative (SG&A) costs LO 1-2, 1-3 Finch Manufacturing Company was started on January 1, year 1, when it acquired $79,000 cash by issuing common stock. Finch immediately purchased office furniture and manufacturing equipment costing $8,400 and $27,200, respectively. The office furniture had an eight-year useful life and a zero salvage value. The manufacturing equipment had a $3,200 salvage value and an expected useful life of three years. The company paid $11,700 for...
isty Company reported the following before-tax items during the current year: Sales revenue $ 760 Selling...
isty Company reported the following before-tax items during the current year: Sales revenue $ 760 Selling and administrative expenses 410 Restructuring charges 60 Loss on discontinued operations 80 Misty's effective tax rate is 40%. What is Misty's income from continuing operations? Multiple Choice $290. $370. $174. $390.
Problem # 1 The monthly sales for Telco Batteries Inc. were as follows:                         Sales Month     &
Problem # 1 The monthly sales for Telco Batteries Inc. were as follows:                         Sales Month            (000 units) January            20 February          21 March              15 April                14 May                 13 June                 16 July                 17 August            18 September       20 October           20 November       21 December        23 Plot the monthly sales data. Forecast coming January sales using each of the following: The naïve approach A 6-month moving average A 6-month weighted average using 0.1, 0.1, 0.1, 0.2, 0.2 and 0.3, with the heaviest...
1) Sales revenue for a sporting goods store amounted to $215,000 for the current period.  All sales...
1) Sales revenue for a sporting goods store amounted to $215,000 for the current period.  All sales are on account and are subject to a sales tax of 7%.  Which of the following would be included in the journal entry to record these sales? A) A debit to Sales revenue for $215,000 B) A credit to Accounts receivable for $215,000 C) A debit to Sales tax payable for $15,050 D) A debit to Accounts receivable for $230,050 2) A $20,000, 3-month, 8%...
Winfield Company operates a retail store a) Below is a table containing monthly sales and sales...
Winfield Company operates a retail store a) Below is a table containing monthly sales and sales staff compensation, in dollars for the previous year. Use the high-low method to create an equation in the form Y = a+ bX to describe the behavior of sales staff compensation. Month Comp Sales 1 412,700 1,808,000 2 386,000 1,659,000 3 359,700 1,512,000 4 346,500 1,138,000 5 359,400 1,218,900 6 341,000 1,233,000 7 366,500 1,409,300 8 364,200 1,437,000 9 400,100 1,616,600 10 443,000 1,833,000...
Problem 12-06 Additional Funds Needed The Booth Company's sales are forecasted to double from $1,000 in...
Problem 12-06 Additional Funds Needed The Booth Company's sales are forecasted to double from $1,000 in 2016 to $2,000 in 2017. Here is the December 31, 2016, balance sheet: Cash $ 100 Accounts payable $ 50 Accounts receivable 200 Notes payable 150 Inventories 200 Accruals 50 Net fixed assets 500 Long-term debt 400 Common stock 100 Retained earnings 250 Total assets $1000 Total liabilities and equity $1000 Booth's fixed assets were used to only 50% of capacity during 2016, but...
Problem 9-6 Additional Funds Needed The Booth Company's sales are forecasted to double from $1,000 in...
Problem 9-6 Additional Funds Needed The Booth Company's sales are forecasted to double from $1,000 in 2015 to $2,000 in 2016. Here is the December 31, 2015, balance sheet: Cash $ 100 Accounts payable $   50 Accounts receivable 200 Notes payable 150 Inventories 200 Accruals 50 Net fixed assets 500 Long-term debt 400 Common stock 100 Retained earnings 250 Total assets $1000 Total liabilities and equity $1000 Booth's fixed assets were used to only 50% of capacity during 2015, but its...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT