Question

Randy Rajoub is evaluating a business opportunity to sell cookware at trade shows. Mr. Rajoub can buy the cookware at a wholesale cost of $210 per set. He plans to sell the cookware for $350 per set. He estimates fixed costs such as plane fare, booth rental cost, and lodging to be $5,600 per trade show.

Required a. Determine the number of cookware sets Mr. Rajoub must sell at a trade show to break even (zero profit or loss). Use the following structure to answer this question:

(1) Contribution Margin Per Unit Approach: A. Determine the amount of the contribution margin per unit. B. Explain that when the total contribution margin is sufficient to pay for the fixed cost, Mr. Rajoub will break even. Show the computation of break-even in units. C. Show how to compute the break-even point in number of dollars using the break-even point in units and the selling price. D. Confirm the results by preparing an income statement.

(2) Contribution Margin Ratio Approach. A. Calculate the contribution margin ratio. B. Use the ratio to calculate the break-even point in sales dollars, then use the results and the selling price to calculate the break-even point in units.

(3) Equation Approach. A. Calculate the break-even point in units. B. Calculate the break-even point in sales dollars. C. Assume Mr. Rajoub desires to earn a profit of $4,900 per show. (1) Determine the sales volume in units (sets of cookware) necessary to earn the desired profit. (2) Determine the sales volume in dollars necessary to earn the desired profit. (3) Using the contribution margin format, prepare an income statement to confirm your answers to parts 1 and 2.

C. Determine the margin of safety between the sales volume at the break-even point and the sales volume required to earn the desired profit. Determine the margin of safety both in sales dollars and as a percentage.

D. After researching the market, Mr. Rajoub concludes that the $350 per set selling price is too high. Customers will likely pay only $310 per set. Mr. Rajoub believes he can obtain a cost reduction from his supplier of $20 per set (variable cost drops from $210 per set to $190 per set) and still provide the level of quality required to achieve a sales volume of 75 sets. Under these circumstances, what amount of fixed costs can Mr. Rajoub incur and still obtain the target profit of $4,900? Support your answer with appropriate computations

Answer 1