Question

Anabelle is the Facilities Manager for a university. She is considering an opportunity that involves renting food vending machines and placing them in various locations throughout the university. This would allow students and staff to conveniently access a quick range of similarly priced food items for snacking “pick-me-up” purposes. (Assume a non-COVID-19 state of affairs on campus.) As a not-for-profit university, the main aim is to cover all costs. If any profits are made, they will be used to boost student support services.

For the purposes of analysing this opportunity, Anabelle has the following estimates:

Per unit (food item) forecasts:

Average selling price of each food item:                 $2.00

Average variable cost of each food item:                $1.60

Annual fixed cost forecasts:                                        

Rental                                                   $12,000

Labour                                                  $10,000

Other fixed expenses                     $2,000

Anabelle has asked you to undertake a cost-volume-profit analysis of the opportunity.

a) Calculate the contribution per unit and the contribution margin ratio.

b) Calculate the break-even point in number of food items and in dollars of revenue.

c) Calculate the sales (in units) needed to earn a target annual profit of $2,000

d) The vending machine owner initially offered Anabelle a fixed rental fee option. However, the owner has since provided another rental agreement option: a $9,000 fixed rental plus 2.5% of revenues from the sale of food items. Calculate the break-even point in units under this option and briefly explain from the university’s perspective which rental agreement option might be preferred. Your explanation should not exceed 100 words.

Answer 1

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