ABC operates a chain of lawn fertilizer stores. Although the fertilizer is sold

Question

ABC operates a chain of lawn fertilizer stores. Although the fertilizer is sold under the ABC label, it is purchased from an independent manufacturer. Sue Smith, president of ABC, is studying the advisability of opening another store. Her estimates of monthly costs for the proposed location are: Fixed costs: Occupancy costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,000 50% is manufacturing related and 50% for office Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,400 all office Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,600 20% is manufacturing related and 80% is office Variable costs (including cost of fertilizer) . . . . . . . . . . . . . . . . . . . . . . . . . . . $12.00 per bag Although ABC stores sell several different types of fertilizer, monthly sales revenue consistently averages $20 per bag sold. Show Detailed Calculations. 1. Compute the contribution margin ratio. 2. Calculate the break-even point in sales dollars AND in bags. 3. Calculate the targeted profit in sales dollars AND units if the company wants $15,000 for income. 4. Smith thinks that the proposed store will sell between 1,500 and 1,800 bags of fertilizer per month. Prepare two Cost Volume Profit Income Statements in good format for these 2 volumes. Please include per unit also. 5. Prepare two traditional income statements for 1500 and 1800 units. 6. If the company purchases materials from a new vendor for $10 per bag but the quality will impact the sales price. How low can the sales price go and still maintain the same contribution margin. ABC operates a chain of lawn fertilizer stores. Although the fertilizer is sold under the ABC label, it is purchased from an independent manufacturer. Sue Smith, president of ABC, is studying the advisability of opening another store. Her estimates of monthly costs for the proposed location are: Fixed costs: Occupancy costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,000 50% is manufacturing related and 50% for office Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,400 all office Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,600 20% is manufacturing related and 80% is office Variable costs (including cost of fertilizer) . . . . . . . . . . . . . . . . . . . . . . . . . . . $12.00 per bag Although ABC stores sell several different types of fertilizer, monthly sales revenue consistently averages $20 per bag sold. Show Detailed Calculations. 1. Compute the contribution margin ratio. 2. Calculate the break-even point in sales dollars AND in bags. 3. Calculate the targeted profit in sales dollars AND units if the company wants $15,000 for income. 4. Smith thinks that the proposed store will sell between 1,500 and 1,800 bags of fertilizer per month. Prepare two Cost Volume Profit Income Statements in good format for these 2 volumes. Please include per unit also. 5. Prepare two traditional income statements for 1500 and 1800 units. 6. If the company purchases materials from a new vendor for $10 per bag but the quality will impact the sales price. How low can the sales price go and still maintain the same contribution margin.

Explanation / Answer

1.) contribution margin ratio = [selling price per unit - variable cost per unit] / selling price per unit

= [$20 - $12] / $20

= $8 / $20

= 40%

2.)    Break even sales in bags = Fixed cost / [selling price per unit - variable cost per unit]

=[$5000 + 2400 + 1600 ] /  [$20 - $12]

= $9000 / $8

= 1125 bags

Break-even point in sales dollars = 1125 bags * $20 per bag

= $22500

3.)   targeted profit in sales dollars AND units if the company wants $15,000 for income :

Targeted profit break even sales = [fixed cost + targeted income] / Contribution margin

=[ $9000 + $15,000] /  [$20 - $12]

=$24000 / $8

= 3000 bags

Targeted profit break even in sales dollar = 3000 bags * $20 per bag

= $60000

4.)   Cost Volume Profit Income Statements      

5.)    traditional income statements   

6.) Still maintain the same contribution margin, If the company purchases materials from a new vendor for $10 per bag ;

contribution margin =  [selling price per unit - variable cost per unit]

$8 = [selling price per unit - $10]

$8 = [selling price per unit - $10]

$8 + $10 = selling price per unit

New selling price per unit = $18

Decrease selling price per unit by = [$20 - $18]

= $2

Therefore, selling price can go to $18 per unit

1,500 bags 1,800 bags Sales (1500 *$20) $30000 (1800 bags * $20) $36000 less: variable cost of goods sold (1500 *$12) 18000 (1800 *$12) 21600 Contribution margin 12000 14400 less: Fixed cost of goods sold (5000 * 50%) + (1,600 *20%) 2820 (5000 * 50%)+ (1,600 *20%) 2820 less: salaries    2,400 2,400 less: selling & admininstrative expenses (5000 * 50%) + (1,600 *80%) 3780 (5000 * 50%) + (1,600 *80%) 3780 Net income $3000 $5400

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