Molly Jasper and her sister, Caitlin Peters, got into the novelties business alm
ID: 2384163 • Letter: M
Question
Molly Jasper and her sister, Caitlin Peters, got into the novelties business almost by accident. Molly, a talented sculptor, often made little figurines as gifts for friends. Occasionally, she and Caitlan would setup a booth at a crafts fair and sell a few of the figurines along with jewelry that Caitlan made. The day came when a buyer for a major department store offered them a contract to produce 1,500 figurines of various designs for $10,000. To make bookkeeping simpler, Molly had priced all the figurines at $8.00 each. Variable operating costs amounted to an average of $6.00 per unit. To produce the the order, Molly and Caitlan would have to rent industrial facilties for a month, which would cost them $4,000.
A. Calculate Mollycaits' operating breakeven point.
B. Calculate Mollycaits' EBIT on the department store order.
C. If Molly renegotiates the contracts at a price of $10.00 per figurine, what will the EBIT be?
D. If the store refuses to pay more than $8.00 per unit but is willing to negotiate quanity, what quanity of figurines will result in an EBIT of $4,000?
E. At this time, Mollycaits come in 15 different varieties. Whereas the average variable cost per unit is $6.00, the actualy cost varies from unit to unit. What reccomendation would you have for Molly and Caitlan with regard to pricing and the numbers and types of units that they offer for sale?
Explanation / Answer
Soln :
A) Mollycaits operating breakeven point.
Break even pointoutput = Fixed cost / contribution per unit
BEPoutput = 4000 / 2 = 2000 units
BEP sales = Fixed cost / contribution X selling price per unit
BEPsales = 4000/2 X 8 = 16,000 dollars
B) EBIT on the department store order.
Sales = 1500 X $ 8 = $ 12,000
Cost of goods sold
Output = 1500 units
Variable cost = $6X1500 = $ 9000
Fixed cost = $ 4000
Total cost = $ 13,000
Cost per unit = $ 8.67
EBIT = sales cost of goods sold = $ 12,000 13,000 = -$ 1000
C) EBIT = sales cost of goods sold
EBIT = 1500X10 13,000 = $ 2,000
D) EBIT = sales cost of goods sold
$ 4000 = QX$8 - $13,000
QX8 = $17,000
Q = 17,000/8 = 2125 units
E) For mollycaits to profit from the proposal they need to produce figurines in quantity greater than the breakeven point. If the store gives an order for 1500 units, the proposal is unviable and will result in a loss.
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