Leslie Mittelberg is considering the wholesaling of a leather handbag from Italy

Question

Leslie Mittelberg is considering the wholesaling of a leather handbag from Italy. She must travel to Italy to check on quality and transportation. The trip will cost $3000. The cost of the handbag is $10 and shipping to the United States can occur through the postal system for $2 per handbag or through a freight company which will ship a container that can hold up to 2000 handbags at a cost of $2000.   The freight company will charge $2000 even if less than 2000 handbags are shipped. Leslie will try to sell the handbags to retailers for $20. Assume there are no other costs and benefits.

a.      What is the break-even point if shipping is through the freight company?

b.      What is the minimum number of units sold if Leslie uses the freight company and she wants a profit of $19,000?  

c.      At what output level would the two shipping methods yield the same profit?

Explanation / Answer

a) Break even point = Fixed Cost / Selling price - Variable COst

Selling Price = $20

Variable Cost = $11(10+1)

Break even point = 2000/20-11 = 222 units

Break even point in sales dollar = 222 x 20 =$ 4440

b) Sales = VAriable Expense +Fixed expense +profit

20Q = 11Q+2000+19000

9Q = 21000

q = 21000/9 = 2333 units

Leslie needs to sell 2333 units in order to earn a profit of $19000

c) Contribution Margin from postal system = 20- 12 = 8

Contribution Margin from freight company = 20- 11 = 9

Average Contribution margin = 9+8/2 =$8.5

Output level = 2000/8.5 =235 units

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