Question

E7-28A (similar to) Eddie Arkin admired his wife's success at selling scarves at local crafts shows, so he decided to make two types of plant stands to sell at the shows. Eddie makes twig stands out of downed wood from his backyard and the yards of his neighbors, so his variable cost is minimal (wood screws, glue, and so forth). However, Eddie has to purchase wood to make his oak plant stands. His unit prices and costs are as follows: Twig Stands Oak Stands Sales price $ 14.00 $ 32.00 Variable cost $ 2.50 $ 8.00 The twig stands are more popular, so Eddie sells four twig stands for every one oak stand. Katie charges her husband $490 to share her booth at the craft shows (after all, she has paid the entrance fees). Requirements: 1. Compute weighted average contribution margin per unit. 2. How many of each plant stand does Eddie need to sell to breakeven?

Answer 1

1. Weighted average contribution margin per unit = (14-2.5)*4/5 + (32-8)*1/5 = $14 per unit

2. Break even = fixed cost / weighted average contribution margin per unit

= 490/14 = 35 units

Twig stands = 35*4/5 = 8 units

Oak stands = 35*1/5 = 7 units