Question

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Practice Questions: 1. James sells a product with a sales price per unit of $10.50, a fixed costs of $8,000, contribution margin ratio of 20.80%. James wants to make a profit of $33,000 this year. At what level of sales will James meet this goal? 2. A company sells 200,000 products at a sales price of $2.70, and variable cost of $1.50 per product. Their fixed costs typically run $80,000. If they run a new ad campaign costing $11,000 during the Super Bowl, they expect to increase sales by 20%. What is the expected change in profits as a result of this potential ad campaign? 3. A company sells 260,000 products at a sales price of $3.12 and variable cost of $1.15 per bag. Their fixed costs typically run $75,000. If they run a new ad campaign costing $11,000 during the Super Bowl, they expect to increase sales by 20%. What is the expected total variable costs as a result of this potential ad campaign? 4. A company sells 210,000 products at a sales price of $5.20 and variable cost of $2.12 per product. Their fixed costs typically run $52,000. If they run a new ad campaign costing $11,000 each year, they expect to increase sales by 20%. What is the expected new breakeven level after the ad campaign is implemented?

Answer 1

Answer-1) Answer-2) 1 Selling Price 2 Contribution Margin 3 Contribution ( 1*2) 4 Fixed cost 5 Desired Profit 10.5 20.80% 2.184 8000 33000 Selling Price Variable cost Contribution (1-2) Fixed cost Profit old condition New condition Per unit In total Per unit in total 200000 240000 200000+20%) $ 2.70 $5,40,000.00 $ 2.70 $6,48,000.00 $ 1.50 $3,00,000.00 $ 1.50 $3,60,000.00 $ 1.20 $2,40,000.00 $ 1.20 $2,88,000.00 $ 80,000.00 $ 91,000.00 (80000+11000) $1,60,000.00 $ 1,97,000.00 6 Desired Profit level =( Fixed cost + Desired profit ) / contribution per unit (8000+33000)/2.184 = 18,773 units Conclusion : Prfit changes from $ 160000/- to 197000/- Answer-3) Verification : 1 No of units to be sold 2 Selling price 3 CM ratio 4 Contribution ( 1*2*3) 5 Less: Fixed cost 6 Profit 18773 10.5 20.80% 41,000 8000 33000 Selling Price Variable cost Contribution (1-2) Fixed cost Profit old condition New condition Per unit In total Per unit in total 260000 312000 (260000+20%) $ 3.12 $8,11,200.00 $ 3.12 $9,73,440.00 $ 1.15 $2,99,000.00 $ 1.15 $3,58,800.00 $ 1.97 $5,12,200.00 $ 1.97 $6,14,640.00 $ 75,000.00 $ 86,000.00 (75000+11000) $4,37,200.00 $5,28,640.00 Total variable cost in new regime was the per unit variable cost i.e 3,58,800 + 11000 for this add that intotal 369800/- in new condition Variable cost because the add design sepcifically for the new condition only it is added to Variable cost under this situation.