Simon Teguh is considering investing in a vending machine operation involving 20

Question

Simon Teguh is considering investing in a vending machine operation involving 20 vending machines located in various plants around the city. The machine manufacturer reports that similar vending machine routes have produced a sales volume ranging from 600 to 800 units per machine per month. The following information is made available to Teguh in evaluating the possible profitability of the operation.

An investment of $45,000 will be required, $9,000 for merchandise and $36,000 for the 20 machines.

The machines have a service life of five years and no salvage value at the end of that period. Depreciation will be computed on the straight-line basis.

The merchandise (candy and soft drinks) retails for an average of 75 cents per unit and will cost Teguh an average of 25 cents per unit.

Owners of the buildings in which the machines are located are paid a commission of 5 cents per unit of candy and soft drinks sold.

One person will be hired to service the machines. The salary will be $1,500 per month.

Other expenses are estimated at $600 per month. These expenses do not vary with the number of units sold.

Determine the unit contribution margin and the break-even volume in units and in dollars per month. (Do not round intermediate calculations. Round "Unit contribution margin" to 2 decimal places.)

What sales volume in units and in dollars per month will be necessary to produce an operating income equal to a 30 percent annual return on Teguh's $45,000 investment? (Do not round intermediate calculations.)

Teguh is considering offering the building owners a flat rental of $30 per machine per month in lieu of the commission of 5 cents per unit sold. What effect would this change in commission arrangement have on his monthly break-even volume in terms of units? (Do not round intermediate calculations.)

Simon Teguh is considering investing in a vending machine operation involving 20 vending machines located in various plants around the city. The machine manufacturer reports that similar vending machine routes have produced a sales volume ranging from 600 to 800 units per machine per month. The following information is made available to Teguh in evaluating the possible profitability of the operation.

Explanation / Answer

Number of machines =20

Investment=45000

Useful life =5 years

Depreciation=Straight line method=5 %

Depreciation per annum=45000-0/5=9000 per annum=750 $

Retail price=.75 per unit

Cost of production =.25 per unit

Commission=.05 per unit

Salary =$1500 per month

Other expenses=$ 600 per month

Variable expenses= .05 per unit

Fixed cost=1500+600+750 per month=2850 per month

Cost =Fixed cost +Variable cost

Total fixed cost=2850

Selling price =.75

Contribution margin per unit=Selling price per unit-Variable cost per unit=.75-.05=.70

Fixed cost =2850

A.

Break even quantity=Fixed cost/Contribution margin per unit=2850/.70 =4071 units

Break even (in $) =Break even quantity * Selling price =4071 * .75 =3053.23 $

Break even (in $)=Total fixed cost/Contribution margin % =2850/93.33%=$3053.23

Contribution margin %=Contribution margin per unit/Selling price per unit *100=.70/.75*100=93.33%

B. Operating income 30 % on 45000

Profit=13500

Selling price n –Variable cost n-Total fixed cost=Profit

N=Number of units to be sold to earn the required profit

.75 n-.05n-2850=13500

.70n-2850=13500

.70n=13500+2850

N=23358 units

C. Variable cost =.05 per unit cancelled and fixed rent per month paid=20*30=600$ per month

New fixed cost=Original fixed cost+ changes=2850+600=$3450

Selling price=.75

Break even =No profit/loss

Break even n =Variable cost n+ Fixed cost

N=Number of units

.75 *n=0 *n+3450

N=3450/.75=4600 units

Break even quantity has moved further due to chnaging the variable commission cost to fixed form.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.