Question

BUS 207 Assignment 5, Chapter 20, Problem

Mobil Seniors is a franchisor of battery operated carts sold mostly to senior citizens. Although the carts are sold under the Mobil Seniors label, the carts are purchased from a manufacturer located in China, Singapore Electric Corporation. The cart business is very competitive, and Swee-Lim Chia, CMO of Mobil Seniors is considering spending $2,000,000 on a regional advertising campaign. The marketing department estimates that Mobil Seniors may be able to increase sales by 3,500 carts if the company conducts the advertising campaign.

Pre-existing Fixed Costs:

Occupancy costs $ 800,000

Salaries $650,000

Other $350,000

Variable costs including the cost of the carts purchased from Singapore Electric $550 per cart

On average, each cart sells for $1,150.

Required:

a. Before Mobil Seniors enters into the advertising campaign, compute the contribution margin per unit and the break-even point in dollar sales and number of carts that must be sold to breakeven.

b. What is the new break-even point in dollar sales and number of carts sold if Chia authorizes the advertising campaign?

c. Assuming that Mobil Seniors does the regional advertising, how many carts does it need to sell in order to earn a before tax profit of $800,000?  

d. Before the advertising campaign, Mobil Seniors was selling 3,334 carts and earning income before tax of $200,000. Do you recommend spending the $2,000,000 for the advertising campaign? Explain your answer.

Answer 1

Req a:
Selling price per cart:			1150
Variable cost per cart:			550
Contribution margin per unit			600
CM ratio: CM / Selling price*100 = 600 /1150 *100 = 52.17%
Total Fixed cost: (800,000+650,000+350,000): $1800,000
Break even in terms of number: Fixed cost/ CM per unit = 1800,000 /600 = 3000 units
Break even in $: Fixed cost/ CM ratio = $1800,000 /52.17% = $ 3450,000
Req b:
Revised fixed cost: 1800,000+2000,000 = $3800,000
Break even in units: 3800,000 /600 = 6333.33 units
Break even in $: 3800,000 /52.17% = $ 7283,330
Req c:
Desired profit: $ 800,000
Desired contribtuion: 3800,000+800,000 =4600,000
Target sale in units: Desired contribution/ Contribution per unit
		$ 4600,000 /600 = 7667 units
Req D:
			Before	After
Sales units			3334	6834
Selling price			1150	1150
Sales revenue			3834100	7859100
Less: variable cost @550			1833700	3758700
Contribution margin			2000400	4100400
Less: Fixed cost			1,800,000	3,800,000
Net income			200,400	300,400
As income has been increassed,
Expenditure on advertisement is recommended