Question

Mark Leahy is considering opening a greeting card shop. Mr. Leahy estimates that the rental cost of the store will be $550 per month. Other relevant costs include:

Greeting cards $0.50 per card sold

Telephone services $95 per month

Electricity $200 per month

Miscellaneous fixed costs $150 per month

Miscellaneous variable cost $0.10 per card sold

Mr. Leahy intends to pay salaries to himself and one part-time store clerk of $1,200 per month, regardless of the number of cards sold.

At present, he estimates an average greeting card selling price of $2 per card.

Required

a. Assuming Mr. Leahy opens the store in October 20x1 and, that month, he sells 3,000 greeting cards, prepare a contribution income statement for the first month of operations.

b. Using your information from the Contribution Income Statement, compute the Leahy Greeting Card Company’s monthly break-even point in sales $ and in unit sales.

c. If the greeting card store’s unit sales increase by 10%, by how much will operating profit increase? Also, at the new sales level, i.e. with the 10% increase, compute the store’s monthly:

i. Contribution margin

ii. Total operating profit

iii. Break-even units and sales dollars

d. Ignoring part c above, suppose the greeting card company pays $150 for advertising with the expectation of increasing unit sales by 15%, at this new sales level, compute the store’s new monthly:

i. Contribution margin

ii. Operating profit

iii. Break-even units and sales

Answer 1

It is assumed that the salary of $1200 per month is combined salary of both self and clerk

For your knowledge

1.Contribution per unit and contribution margin doesn't change with change in the sales volume.

2.Break even point of sales changes with change in variabl or fixed costs but doesn't change with the change in Sales volume.