BUS 207 Assignment 5, Chapter 20, Problem Mobil Seniors is a franchisor of batte
ID: 2527060 • Letter: B
Question
BUS 207 Assignment 5, Chapter 20, Problem
Mobil Seniors is a franchisor of battery operated carts sold mostly to senior citizens. Although the carts are sold under the Mobil Seniors label, the carts are purchased from a manufacturer located in China, Singapore Electric Corporation. The cart business is very competitive, and Swee-Lim Chia, CMO of Mobil Seniors is considering spending $2,000,000 on a regional advertising campaign. The marketing department estimates that Mobil Seniors may be able to increase sales by 3,500 carts if the company conducts the advertising campaign.
Pre-existing Fixed Costs:
Occupancy costs $ 800,000
Salaries $650,000
Other $350,000
Variable costs including the cost of the carts purchased from Singapore Electric $550 per cart
On average, each cart sells for $1,150.
Required:
a. Before Mobil Seniors enters into the advertising campaign, compute the contribution margin per unit and the break-even point in dollar sales and number of carts that must be sold to breakeven.
b. What is the new break-even point in dollar sales and number of carts sold if Chia authorizes the advertising campaign?
c. Assuming that Mobil Seniors does the regional advertising, how many carts does it need to sell in order to earn a before tax profit of $800,000?
d. Before the advertising campaign, Mobil Seniors was selling 3,334 carts and earning income before tax of $200,000. Do you recommend spending the $2,000,000 for the advertising campaign? Explain your answer.
Explanation / Answer
Req a: Selling price per cart: 1150 Variable cost per cart: 550 Contribution margin per unit 600 CM ratio: CM / Selling price*100 = 600 /1150 *100 = 52.17% Total Fixed cost: (800,000+650,000+350,000): $1800,000 Break even in terms of number: Fixed cost/ CM per unit = 1800,000 /600 = 3000 units Break even in $: Fixed cost/ CM ratio = $1800,000 /52.17% = $ 3450,000 Req b: Revised fixed cost: 1800,000+2000,000 = $3800,000 Break even in units: 3800,000 /600 = 6333.33 units Break even in $: 3800,000 /52.17% = $ 7283,330 Req c: Desired profit: $ 800,000 Desired contribtuion: 3800,000+800,000 =4600,000 Target sale in units: Desired contribution/ Contribution per unit $ 4600,000 /600 = 7667 units Req D: Before After Sales units 3334 6834 Selling price 1150 1150 Sales revenue 3834100 7859100 Less: variable cost @550 1833700 3758700 Contribution margin 2000400 4100400 Less: Fixed cost 1,800,000 3,800,000 Net income 200,400 300,400 As income has been increassed, Expenditure on advertisement is recommended
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