The system comes with a 12V lead-acid battery and a 40-Watt solar panel. The cus

Question

The system comes with a 12V lead-acid battery and a 40-Watt solar panel. The customer is charged $1500. for a solar suitcase. The company has five (5) salespeople. Each salesperson is paid an annual salary of $14,000. All manufacturing equipment is leased on an annual basis including assembly equipment at $24,000. per year. Building space is leased at the rate of $500 per month. The cost of goods sole is $500/solar suitcase.

PLEASE SHOW STEPS ON PAPER OR HOW TO USE EXCEL SPREAD SHEET TO CALCULATE THE ANSWERS BELOW:

1. Compute the contribution margin per suitcase. Compute the annual break-even point in the number of suitcases sold.

2. Assume the salespeople now receive $500 commission (instead of annual salary) on the sale of each suitcase. What is the new contibution margin per suitcase? What is the new annual break-even point in the number of suitcases?

3. Which cost-structure would you recommend and WHY? (Hint: On one graph, plot total revenue, total costs (on the vertical "y" axis) versus solar suitcases on (horizontal "x" axis) for the two alternatives above.

Explanation / Answer

1. Contribution Margin per suitcase:-

Sales Price- Variable Cost = 1500- 500= 1000 per suitcase.

Annual Break-even point = Fixed Cost/ Contribution per unit

Total Fixed Cost= (14000*5)+ 24000 + (500*12)= 1,00,000 $

Break even point = 1,00,000/1,000= 100 suitcase

2. New Contribution Margin

Sales- Variable Cost= 1,500-500-500= 500 per suitcase

New Break-Even point= 30,000/500= 60 suitcases

3. The 2nd option i.e. Commission to sales persons instead of Annual Salary is recommended, as it is the option with early break-even sales point. After that, the business will earn only profits, as the fixed costs will already have been recovered.

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