Question

1. KML Enterprises sells clocks for $100 each and expects variable product costs to be $70 per unit with total fixed costs of $150,000. (Base Case)

2. e) Starting from the base case scenario, the sales manager is convinced that sales would increase from

3. 8,500 to 11,500 units if the company simply replaces $60,000 of fixed cost for the sales rep with a sales

   commission of $12 per unit sold. Should the company make the change? Justify your answer. (7.5pts)

4. f) The company decided to reduce the base case sales price by 10% because of stale inventory. What is the

   minimum number of units the company must produce and sell to break even, given the base case

   variable cost structure? (6pts)

5. g) The company believes they can produce and sell more but they would have to rent additional warehouse

   space for $25,000 per year. Using the base case scenario, how many more units would they have to sell to justify them renting the additional space? (4.5pts)

Answer 1

Solution:

Comparitive Study
Units Sold	8500	11500
Sales Revenue (Units *$100)	850000	1150000
Less: Variable Costs (Units *$70)	595000	805000
Sales Commision (Units *$12)		138000
Contribution Margin	255000	207000
Less: Fixed Costs	150000	90000
Net Income	105000	117000

Fixed cost for 11500 units sold = $150000 - $60000 = $90000 (replaced by variable sales commission)

2.

Selling Price	100
Less: Variable Costs	70
Contribution Margin	30

The break even point never changes to the number of units sold.

Break Even Point	=Fixed Costs / CM per unit
	=150000/30
	5000 units

3.

New Fixed Costs
Existing	150000
Add: Additional Rent	25000
New Fixed Costs	175000

Break Even Point (New)	=Fixed Costs / CM per unit
	=175000/30
	5833 units

They need to sell 833 units more.

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