Question

Sephora sells beauty products. A small lip gloss, sells for $50 per unit. The contribution margin per lip gloss is 35% while the fixed expenses associated with the stove total $105,000 per month.

a. Compute the break-even point in unit sales and in dollar sales.

b. At present, the company is selling 10,000 glosses per month. The sales manager is convinced that a 20% reduction in the selling price would result in a 25% increase in monthly sales of lipgloss. Should Sephora reduce the selling price?

c. How many lipglosses would have to be sold at the new selling price to produce a net operating income of $40,000 per month?

Answer 1

Ans.

a.

Per Unit Sales price= $50

Contribution margin per unit is      35 %

hence contribution is     35% of   $50    =   $17.5 per unit

Variable Cost

=50-17.5

Variable Cost

$           32.50

Fixed cost per month =

$1,05,000

Break even point in unit=

Fixed cost/contribution per unit

'=

=105000/17.5

'=

6000 units

Break even point in dollar sales=

6000*$50

'=

$3,00,000

b.

At present company is selling 10000 units per month

Sales prices

=10000*50=

500000

Contribution=35%

'=500000*35%

'=

175000

Less: Fixed Cost=

-105000

'Profit '=

70000

If Companay reduces 20% sales prices then increased units in month sales will be 25% more

revised Sales price=

=50-20%

revised Sales price=

40

revised Sales unit=

=10000+25%

revised Sales unit=

12500

revised Sales =

=12500*40

revised Sales =

500000

Less : Variable Cost @$32.5

406250

Contribution=

93750

Less: Fixed cost per month =

1,05,000

Loss

(11,250)

Hence there is decrease in contribution and resulting in loss after reducing the price hence price should not be reduced .

c.

To make $40000 profit per month

revised Sales price=

40

Less : Variable Cost @$32.5

32.5

Contribution per unit =

7.50

Fixed Cost=

$1,05,000

Break even point in unit=

=105000/7.5

14000

To make $40000 profit per month required units will be

=break even unit i.e 14000 + 40000/7.5

=14000 + 40000/7.5

19333

To make $40000 profit per month 19333 units will be required to sold