break even

Question

 

Riccardo Food Services Company operates and services soft drink vending machines located in restaurants, gas stations, and factories in four southeastern states.  The machines are rented from the manufacturer.  In addition, Riccardo must rent the space occupied by its machines.  The following expense and revenue relationships pertain to a contemplated expansion program of 40 machines.

 

Fixed monthly expenses follow:

 

Machine rental: 40 machines @ $53.50                                   $2,140

Space rental: 40 locations @ $38.80                                          1,552

Part-time wages to service the additional 40 machines             2,008

Other fixed costs                                                                          300

Total monthly fixed costs                                                        $6,000

 

Other data follow:

 

                                                                  Per Unit                   Per $100 of Sales
Selling price                   $1.00                                100%

Cost of snack                     .80                                  80

Contribution margin       $  .20                                  20%

 

Required:

 

These questions relate to the above data unless otherwise noted. Consider each question independently.

1.   What is the monthly break-even point in number of units?  In dollar sales?

 

2.   If 40,000 units were sold, what would be the company’s net income?

 

3.   If the space rental cost were doubled, what would be the monthly break-even point in number of units?  In dollar sales?

 

4.   If, in addition to the fixed rent, Riccardo Food Services Company paid the vending machine       manufacturer 24 per unit sold, what would be the monthly break-even point in number of units?        In dollar sales?  Refer to the original data.

 

5.   If, in addition to the fixed rent, Riccardo paid the machine manufacturer 44 for each unit sold in excess of the break-even point, what would the new net income be if 40,000 units were sold? Refer to the original data.

Answer 1

This is a very simple problem until we get to parts 4 and 5.
     1. $6,000 of fixed cost at $0.20 contribution margin / Unit or 20% contribution margin it will take 30,000 units to breakeven

   .
2. At 40,000 units; Revenue = $40,000, Variable cost = $32,000 (40,000 units @ $.80/unit) This is not the same a cost of goods sold (COGS). Fixed cost stay at $6,000. This is not the same as overhead. Therefore Pre Tax Net income is $2,000.

3. If space rent increases 100% the new fixed cost are $7,552. At the same dollar contribution margin/ unit and the same contribution margin per cent the new breakeven is $37,760 and 37760 units. ($7552/.2)=37,7760 units and dollars.

4. The information does not compute! If the contribution margin is $.20/ unit what is the 24 per unit. It cannot be $24 or even $0.24. That is in excess of the contribution margin

5. Same problem as part 2.

 

It seems that 4 and 5 are trying ti introduce increase in variable cost.