Browns\' Company sells ten different styles of relatively inexpensive football j

Question

Browns' Company sells ten different styles of relatively inexpensive football jerseys with identical purchase costs and selling prices. Brown is trying to determine the desirability of opening another store, which would have the following expense and revenue relationships (variable data on a per unit basis, fixed expenses in total):

Variable data: Selling Price $40.00; Cost of Shirt $18.00; Sales Commissions $7.00

Annual fixed expenses: Rent$80,000; Salaries $150,000; Other fixed expenses $70,000

1. What is the annual breakeven point in dollar sales AND units?

2. If 21,000 jerseys are sold, what would be the stores operating income (loss) ?

3. Refer to the original data. If Brown decided to do away with sales commissions and increase salespersons salaries by $140,000 per year, what would be the point of indifference, in units, between the two alternatives? That is, at what point would the two operating incomes (current and proposed) be the same?

4. Brown has been approached by the Bear Advertising Agency to do their advertising. If Brown signs a contract for $150,000 for Bear to handle their account, how many additional units have to be sold to cover the cost of the advertising?

Please show your work.

Explanation / Answer

1. What is the annual breakeven point in dollar sales AND units? Answer-Annual Break even point in dollar=$800000 and in units=20000 units Particulars Amount in $ Selling price 40 Less- Variable expenses Shirt cost 18 Sales Commissions 7 25 Contribution( sales price - variable cost) per unit 15 PV ratio( contribution/sales) 37.50% Annual Fixed cost- Rent 80000 salaries 150000 Other fixed expenses 70000 300000 Annual Break even point in dollar sales= Annual fixed cost/ Pv ratio Annual Break even point in dollar sales 800000 Annual Break even point in units= Annual fixed cost/ contribution per unit Annual Break even point in units= 20000 2. If 21,000 jerseys are sold, what would be the stores operating income (loss) ? Answer- $15000 Particulars Amount in $ Total Contribution ( 21000 units * $15 per unit) 315000 Less- annual fixed cost 300000 Operating income 15000 3.what would be the point of indifference, in units, between the two alternatives Answer=At 20000 units of sales both the operating income will be same. Working- Suppose the point of indifference in quantity is x So the equation will be like this - 15x-300000=(40-18)x-300000-140000 15x-300000=22x-440000 7x=140000 x=20000 At 20000 unitsof sales both the operating income will be same. check- operating income at alternative 1=(20000*15)-300000 0 operating income at alternative 2=(20000*22)-300000-140000 0 4. Additional units have to be sold to cover the cost of the advertising? Answer=10000 units working- Additional advertisement cost/ Contribution per unit 10000

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