Toy Box Inc. is contemplating expanding sales of their children\'s toys. They ha
ID: 2407612 • Letter: T
Question
Toy Box Inc. is contemplating expanding sales of their children's toys. They have an opportunity to stock and sell the X toy that has been a big hit with children everywhere. They need to order the X toys from the manufacturer in a minimum order of 100 at a cost of $12 each. They can resell the X toy in their store for $22 each. Due to anticipated demand, Toy Box Inc. will need to hire an additional part-time cashier at $600 a month which will be classified as a fixed-cost attributable to the X toy. Also, they have offered a $1 sales commission per toy to their floor sales representative. They will also include a package of trading cards with every purchase of an X toy, which will cost them an additional $2 each. Required: To make the project worthwhile, Toy Box Inc. would need to achieve a $5,000 profit per month. What level of sales, in units and in dollars, would be required to reach this target profit? Show all computations completely in a table inserted into your document. Assume that the venture is undertaken and an order is placed for 100 X toys. What would be Toy Box's break-even point in units and in sales dollars? Show computations completely in an inserted table, and explain the reasoning behind your answer. You can ignore the fixed cost of $600 for this part. Assuming it would not affect sales, how would your answer to #2 change if the company did not offer the $2 trading cards as part of the deal?
Explanation / Answer
Part 1
Calculation of Contribution Margin
Sale price of toy
$ 22.00
Less Costs
Purchase Price
$ 12.00
Sales Commission
$ 1.00
Trading Card Cost
$ 2.00
$ 15.00
Contribution
$ 7.00
To earn a profit of 5000 company will have to sell units that can cover variable cost of 15 per unit and fixed cost of 600.
Profit to be earned
$ 5,000.00
Fixed Cost
$ 600.00
Gross Receipts from sales
$ 5,600.00
No of units to earn 5600
(5600/7)
=
800 Units
Calculation of profit at sale of 800 Units
Sales revenue
(800*22)
17600
Less: Variable Cost
(800*15)
12000
Contribution
5600
Less : Fixed Cost
600
Net profit
5000
Sales in Dollars
$ 17,600.00
Sales in Units
800 Units
Part 2
Breakeven point =
Fixed cost/Contribution Margin
(600/7)
85.71 Units
Breakeven Units
or 86 Units (Approx)
Breakeven sales in Dollars (86*22)
$ 1,892.00
Part 3
If Fixed cost is ignored and variable cost is reduced by 2 dollars per toy
Breakeven sales unit will be zero since every sale will generate cash as fixed cost will not require to be recovered.
Notes :It is Assumed that fixed cost is ignored for the third part.
Alternate solution is also given for part 2 and 3 assuming Fixed cost is ignored for 2nd part only.
Part 2 Alternate Solution
Break even sales is a sale point at which fixed cost is fully recovered and company makes no profits and looses at breakeven point.
Breakeven =
Fixed cost/Contribution per unit
Breakeven =
0/7
0
There is no breakeven point in this situation
Part 3 Alternate Solution
If company did not offer trading cards Variable cost will reduce by 2 Dollars
New Variable cost
(15-2)
13
New Contribution margin
(7+2)
9
Breakeven point =
Fixed cost/Contribution Margin
(600/9)
66.66 Units
Breakeven Units
or 67 Units (Approx)
Breakeven sales in Dollars (67*22)
$ 1,474.00
Part 1
Calculation of Contribution Margin
Sale price of toy
$ 22.00
Less Costs
Purchase Price
$ 12.00
Sales Commission
$ 1.00
Trading Card Cost
$ 2.00
$ 15.00
Contribution
$ 7.00
To earn a profit of 5000 company will have to sell units that can cover variable cost of 15 per unit and fixed cost of 600.
Profit to be earned
$ 5,000.00
Fixed Cost
$ 600.00
Gross Receipts from sales
$ 5,600.00
No of units to earn 5600
(5600/7)
=
800 Units
Calculation of profit at sale of 800 Units
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.