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.

Required:

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

Answer (a)

Sales Price - 75 cents per unit

Variable cost = 25 cents per unit + 5 cents per unit (commission paid on the basis of volume) = 30 cents

Contribution per unit = sales price - variable cost = 75-30 = 45.00 cents per unit

Fixed cost = salary + monthly expenses + depreciation on machines (these expenses do not vary with production quantity and are hence fixed in nature)

= 1500+600+(36,000/5) = 9300 cents

Note: please note that investment in merchandise is current asset as this merchandise will be used for trading operations through which revenue will be generated.

Breakeven unit volume = Fixed cost/ contribution per unit

= 9300 cents/ 45 cents = 206.67 units

Breakeven dollar value = Fixed cost/ contribution margin ratio

contribution margin ratio = (sales price per unit- variable cost per unit)/ sales price

= (75-30)/75 = 60%

Breakeven dollar value = 9300 cents/ 60% = 15,500 cents

Answer (c)

Required profit = 45,000X 30%= 13,500 cents

Desired sales in units = (Fixed cost+targeted profit)/ contribution per unit

= (9300+13,500)/45 cents per unit = 506.67 units

Desired sales in value= (Fixed cost+targeted profit)/ contribution margin ratio

= (9300+13,500)/60% = 38,000 cents

Answer (d)

Sales price per unit = 75 cents per unit

Variable cost per unit = 25 cents per unit (commision is fixed now)

Contribution per unit = 50 cents per unit

Contribution margin ratio = (75-25)/75 = 66.67%

Fixed cost = salary + monthly expenses + depreciation + commission

= 1500+600+(36,000/5)+30 = 9330 cents

New break even units = New fixed cost/ New contribution per unit

= 9330 cents/50 cents per unit = 186.60 units

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

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