The cost of renting the machine for each store to prepare money orders is $30 pe

Question

The cost of renting the machine for each store to prepare money orders is $30 per month. The lease rent for the store is $5000. For each money order processed, On-the-Go would pay a processing fee of 6 cents. After conducting an informal survey of banks and other local businesses that offered money order services, On-the-Go found that most charged 99 cents for each money order transaction. on-the-go planned to set its money order fee at 70 cents to undercut local competition. Kankel estimated that a money order transaction would take one counter clerk 90 seconds to complete, versus only 30 seconds for ringing up a product sale. The average hourly wage for a store clerk is $12.00 per hour. On-the-go does not plan to hire any new clerks or ask existing clerks to work longer hours if it decides to sell money orders.

a. Calculate the contribution margin per unit for money orders. b. Calculate how many money orders each On-the Go location would need to sell each month to break even on the service. c. Calculate how many orders each on-the-go location would need to sell each month to earn an operating income of $140 per month.

Explanation / Answer

a Calculation of Contribution margin Per Unit Money Order Fee 0.7 Less: Variable Cost Processing Fee 0.06 Clerk Fee per money order 0.4 (90+30/(60 Seconds *60 minutes)*12 per hour) Contribution Margin 0.24 B Break even on the service px = vx + FC + Profit Where, p is the price per unit, x is the number of units, v is variable cost per unit and FC is total fixed cost. Calculation BEP in Sales Units At break-even point the profit is zero therefore the CVP formula is simplified to: px = vx + FC Solving the above equation for x which equals break-even point in sales units, we get: Break-even Money Orders = x = FC p v Total Fixed Cost Rent for Money order machine 30 Lease Rent 5000 5030 Break Even Money Orders = 5030/(0.7-0.46) = 20958 Money Orders c How many money orders to be sold to get operating income of $ 140 Desired Profit 140 Total Fixed Cost 5030 Total Cost 5170 No of Money orders to be processed = Total Cost / Contribution per unit = 5170/0.24 = 21542 Money Orders

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