Question

Without referencing the book or the videos, review the following sales and cost data for LBCC Bike shop. Can you determine how many bikes you must sell each month in order to break even (net income of $0)? Make sure you defend your approach.

No one runs a business with the goal of only breaking even. How many bikes would you need to sell each month to earn $1,200 net income?

Lastly, you are considering a $2,000 advertising campaign that is expected to result in a one-time increase in sales of 15 bikes. Should you do it?

Sales Price	$    200
Costs
Frame	$      30
Seat	$      10
Tires (each)	$        5
Rent (monthly)	$    900
Manager salary (monthly)	$ 2,000
Assembly (per bike)	$      25
Depreciation (monthly)	$    100

Hint: consider fixed versus variable costs.

Responses should be a minimum of 50 words.

Answer 1

• All working forms part of the answer
• Requirement 1: Break Even number of bikes.

In order to calculate no. of bikes to be sold to attain break even [Zero Net Income], Fixed cost is divided by contribution margin per bike.

Working for Fixed and variable cost

Costs			Variable cost per Bike	Fixed Cost
Frame	$      30	per bike = Variable cost	$30
Seat	$      10	per bike = Variable cost	$10
Tires (each)	$        5	= $10 per bike = Variable cost	$10
Rent (monthly)	$    900	monthly = fixed cost		$900
Manager salary (monthly)	$ 2,000	monthly = fixed cost		$2000
Assembly (per bike)	$      25	per bike = Variable cost	$25
Depreciation (monthly)	$    100	monthly = fixed cost		$100
		TOTAL	$75	$3000

A	Fixed Cost [total]	$3000
B	Sale price per unit	$200
C	Total Variable cost per unit	$75
D=B-C	Contribution margin per unit	$125
E=A/D	Break Even point [no. of bikes]	24 bikes

If 24 bikes are sold, Net Income would be Nil or Zero

Sales revenue	[24 x 100] $4800
(-) variable cost	[24 x 75] $1800
Contribution margin	$3000
(-) total fixed cost	$3000
Net Income	$0

• Answer 2: No. of bikes required to earn a target income of $1200

A	Target Income	$1200
B	Fixed Cost	$3000
C=A+B	Total contribution margin required to earn target income	$4200
D	Contribution margin per unit	$125
E=C/D	No. of bikes to be sold to earn the target income	33.6 bikes [round off as required]

• Answer 3

Increase in contribution margin [15 bikes x $125]	$1875
(-) Increase in Cost of advertising campaign	$2000
Net Benefit (Loss)	$(125)

Since, the additional benefits arising from advertising campaign ($1875) is less than the advertising cost that is to be incurred ($2000), IT SHOULD NOT BE DONE.