Question

Modern convenience stores realize they have to offer more than late night hours and a diverse product assortment to attract customers they have to change with the times or face extinction. Over the years convenience stores have stocked new products and services such as gasoline, lottery tickets, and even internet shopping and delivery services. A walk through any convenience store is likely to reveal in excess of 3,000 different products and services often available 24 hours a day 7 days a week. There are iclose to 132,500 convenient stores in the USA. The industry generated $337 billion in sales for 2003

Store 24 based in Waltham Massachusetts operates 82 stores in its chain of convenience stores. Locations are primarily in the New England and the Mid Atlantic regions of the USA where there are about 19,000 convenience stores, approximately 14% of the country's total. As part of an accounting class assignment Tanisha Jones made a visit to the Store 24 headquarters to learn more about the company. The class instructor directed students to find a local business that uses cost volume profit analysis for decision making and to identify a scenario where cost volume profit analysis was used. Since Tanisha worked part time at the Store 24 in her neighborhood after school she wanted to use her employer for the assignment.

Paul Doucette is Store 24's chief financial officer. He agreed to meet with Tanisha and help with her assignment. Paul assembled a set of reports and information Tanisha may useful for the assignment. Paul told Tanisha that Store 24 uses cost volume profit analysis in many situations. For example company managers recently evaluated preparing in store deli sandwiches for lunchtime customers vs prepackaged deli sandwiches provided by an outside vendor. This effect on income of the store's sales mix also had been reviewed and sensitivity analysis had been performed to see the effect of changing the selling price of milk

One recent use of cost volume profit analysis that Paul thought would make a good illustration was the company's decision regarding the sale of money orders at its stores. Paul explained that this was a new product area for the company, a financial service much like a bank would offer. By offering this new service Store 24 hoped to boost its customer count. Previous studies have shown that customers were likely to buy more than just the items they originally intended to purchase. So Store 24 wanted to boost sales revenue by giving customers another reason to come into the store and buy more than intended.

Paul outlined for Tanisha the following information related to the analysis. The cost of renting the machine used in each store to prepare money orders is $30 a month. For each money order processed Store 24 paid a processing fee of 6 cents. After conducting an informal survey of banks and other local businesses that offered money order services Store 24 found most charging 99 cents for each money order transaction. Store 24 decided to price its money order fee at 79 cents to undercut the local competition. Paul estimated that a money order transaction would take one counter clerk 90 seconds to complete vs only 30 seconds for ringing up a product sale. The average hourly wage for a store clerk is $9 per hour. Store 24 considered this labor cost as a variable cost

Question
Using both the equation method and contribution method margin method how many money orders would each Store 24 location have to sell each month to break even on the service?

Answer 1

1 60x60 ^ Eyuatio Method: let "x" be the number of money orders variable labour cost perordis = 9057 308 x 9 =$003 per ordy = 30 cents per ordes. (+) processing fee perscords = 6 cent Total variable cost per ordu = 36 cents At Breakeven point, fixed cost - Sales - variable cost (30x100) = *(79-36) 3000 = 432 X = 69.76 X = 70 Orders 70 orders needed to sell each month to break wen : on the service-
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conmibution margin method! : 79 cents Selling price per order (m) variable cost labour cost processing fee = (30) = (6) : 43 cents" Contribution margin - peroran = Breale event points fixed cont cincantes Contribution margin perordes $30x100 93 LES AUSD 69.76 = 70 orden. 70 orders needed to sell each month to break even on the service.