Question

Toy Box Inc. is contemplating expanding sales of their children's toys. They have an opportunity to stock and sell the X toy that has been a big hit with children everywhere. They need to order the X toys from the manufacturer in a minimum order of 100 at a cost of $12 each. They can resell the X toy in their store for $22 each. Due to anticipated demand, Toy Box Inc. will need to hire an additional part-time cashier at $600 a month which will be classified as a fixed-cost attributable to the X toy. Also, they have offered a $1 sales commission per toy to their floor sales representative. They will also include a package of trading cards with every purchase of an X toy, which will cost them an additional $2 each. Required: To make the project worthwhile, Toy Box Inc. would need to achieve a $5,000 profit per month. What level of sales, in units and in dollars, would be required to reach this target profit? Show all computations completely in a table inserted into your document. Assume that the venture is undertaken and an order is placed for 100 X toys. What would be Toy Box's break-even point in units and in sales dollars? Show computations completely in an inserted table, and explain the reasoning behind your answer. You can ignore the fixed cost of $600 for this part. Assuming it would not affect sales, how would your answer to #2 change if the company did not offer the $2 trading cards as part of the deal?

Answer 1

Part 1	Calculation of Contribution Margin
	Sale price of toy		$    22.00
	Less Costs
	Purchase Price	$                                                   12.00
	Sales Commission	$                                                     1.00
	Trading Card Cost	$                                                     2.00	$    15.00
	Contribution		$       7.00
	To earn a profit of 5000 company will have to sell units that can cover variable cost of 15 per unit and fixed cost of 600.
	Profit to be earned	$                                             5,000.00
	Fixed Cost	$                                                 600.00
	Gross Receipts from sales	$                                             5,600.00
	No of units to earn 5600	(5600/7)	=	800 Units
	Calculation of profit at sale of 800 Units

Sales revenue	(800*22)	17600
Less: Variable Cost	(800*15)	12000
Contribution		5600
Less : Fixed Cost		600
Net profit		5000

Sales in Dollars	$                                           17,600.00
Sales in Units	800 Units

Part 2	Breakeven point =	Fixed cost/Contribution Margin
		(600/7)
		85.71 Units
	Breakeven Units	or 86 Units (Approx)
	Breakeven sales in Dollars (86*22)	$                                             1,892.00

Part 3	If Fixed cost is ignored and variable cost is reduced by 2 dollars per toy
	Breakeven sales unit will be zero since every sale will generate cash as fixed cost will not require to be recovered.
	Notes :It is Assumed that fixed cost is ignored for the third part.
	Alternate solution is also given for part 2 and 3 assuming Fixed cost is ignored for 2nd part only.
Part 2 Alternate Solution
	Break even sales is a sale point at which fixed cost is fully recovered and company makes no profits and looses at breakeven point.
	Breakeven =	Fixed cost/Contribution per unit
	Breakeven =	0/7
		0
	There is no breakeven point in this situation
Part 3 Alternate Solution	If company did not offer trading cards Variable cost will reduce by 2 Dollars
	New Variable cost	(15-2)		13
	New Contribution margin	(7+2)		9

Breakeven point =	Fixed cost/Contribution Margin
	(600/9)
	66.66 Units
Breakeven Units	or 67 Units (Approx)
Breakeven sales in Dollars (67*22)	$                                             1,474.00