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. 1. An investment of $45,000 will be required, $9,000 for merchandise and $36,000 for the 20 machines. 2. 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. 3. 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. 4. 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. 5. One person will be hired to service the machines. The salary will be $1,500 per month. 6. Other expenses are estimated at $600 per month. These expenses do not vary with the number of units sold. a. 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.) c. 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.) d. 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.)

Explanation / Answer

Selling price 0.75 Variable Cost Cost of candy 0.25 Commission 0.05 0.30 Contribution per unit 0.45 Fixed Cost Machine cost 36000 Salary 1500 pm other expes 600 pm Depriciation ( 36000/5/12) 600 pm 2700 a) Contribution Margin ration = contribution per unit / sales per unit * 100                                                         = 0.45 /0.75*100                                                          = 60 % Break even point ( in units) = Fixed Cost / Contribution per unit                                                               = 2700 / 0.45                                                                = 6000 units Break even point ( in $) = BEP ( in units) * Selling price                                                 = 6000 * 0.75                                                 = 4500 c) Operating income required = 30% of 45000                                                               = 45000 *30%                                                                = 13500 Profit required = 2700 + 13500 = 16200 Number of units = profit required / contribution per unit = 16200 / 0.45 = 36000 units Value in dollars = Number of units * selling price                                  = 36000 * 0.75                                  = 27000 d) Revised Break even point Selling price 0.75 Variable Cost Cost of candy 0.25 Commission 0 0.25 Contribution per unit 0.50 Fixed Cost Machine cost 36000 Salary 1500 pm other expes 600 pm Rent 30 pm Depriciation 600 pm 2730 Break even point ( in units) = Fixed Cost / Contribution per unit = 2730/0.50 = 5460 units Break even point ( in $) = BEP ( in units) * Selling price                                                  = 5460 * 0.75 = 4095

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