Question

Question # 1

Barhom’s Cellular (BC) is a distributor and sells phones for $1250. BC gets the phones for $900 each. BC pays the sales staff a commission of 10% for each phone sold. BC’s fixed selling, administrative & other fixed costs total $36,900 per year.

Required:

1. How many phones BC needs to sell to achieve a target profit of $51,000 a year?

2. BC is considering selling another type of phone. The new phone has a cost of $1,400 and will be sold for $2,000 each. The sales commission policy will apply for the new phone too. Barhom expects that out of every four phones he sells one will be from the new one and three from the old one. How many phones of each he needs to sell to breakeven.

Answer 1

Answer a.

Selling price per unit = $1,250

Variable cost per unit = Cost per unit + Sales commission per unit
Variable cost per unit = $900 + 10% * $1,250
Variable cost per unit = $1,025

Contribution margin per unit = Selling price per unit - Variable cost per unit
Contribution margin per unit = $1,250 - $1,025
Contribution margin per unit = $225

Required sales in unit = (Fixed expenses + Target profit) / Contribution margin per unit
Required sales in unit = ($36,900 + $51,000) / $225
Required sales in unit = $87,900 / $225
Required sales in unit = 391

Answer b.

Old Phone:

Selling price per unit = $1,250

Variable cost per unit = Cost per unit + Sales commission per unit
Variable cost per unit = $900 + 10% * $1,250
Variable cost per unit = $1,025

Contribution margin per unit = Selling price per unit - Variable cost per unit
Contribution margin per unit = $1,250 - $1,025
Contribution margin per unit = $225

New Phone:

Selling price per unit = $2,000

Variable cost per unit = Cost per unit + Sales commission per unit
Variable cost per unit = $1,400 + 10% * $2,000
Variable cost per unit = $1,600

Contribution margin per unit = Selling price per unit - Variable cost per unit
Contribution margin per unit = $2,000 - $1,600
Contribution margin per unit = $400

Sales Mix is 3 old phone and 1 new phone

Weighted average contribution margin per unit = (3/4) * $225 + (1/4) * $400
Weighted average contribution margin per unit = $268.75

Overall breakeven sales in unit = Fixed expenses / Weighted average contribution margin per unit
Overall breakeven sales in unit = $36,900 / $268.75
Overall breakeven sales in unit = 137

Breakeven sales for old phone = (3/4) * 137
Breakeven sales for old phone = 103

Breakeven sales for new phone = (1/4) * 137
Breakeven sales for new phone = 34