Question

ACCY307: Chapter 3: CVP In-Class Exercise: You are the advisor of a Junior Achievement group in a local high school. You need to help the group make a decision about fees that must be paid to sell gardening tools at the Home and Garden Show. The group sells a set of tools for $20.00. The manufacturing cost (all variable) is $6 per set. The Home and Garden Show coordinator allows the following three payment options for groups exhibiting and selling at the show. SP - 20 VL=56 1. Pay a fixed booth fee of $5,600. 2: Pay a fee of $3,800 plus 10% of all revenue from tool sets sold at the show. 3 VOLI 3. Pay 15% of all revenue from tool sets sold at the show. con b cco REQUIRED: A. Compute the breakeven number of tool sets for each option. B. Which payment plan has the highest degree of operating leverage? C. Which payment plan has the lowest risk of loss for the organization? Explain. D. At what level of revenue should the group be indifferent to options 1 and 2? E. Which option should Junior Achievement choose, assuming that sales are expected to be 1,000 sets of tools? Explain.

Answer 1

Answoro Groven information, selling price of gradering tool = 45 Variable manufactering cost = £6. @ calcellate break even point: optiong fired cost break Even point = : contribution par unit .: 20-4 = $14 posto). = 400 tool seta aptiones break Even pont - fixed fec. Contribuer fion - barviable-fee from Exhibition $3,800 Pacm 6) -(@oxon) = $3800

3800 - 2800 = 317 tool set. option , break Even point =- fixed fee conturbertion percconit - varble fee-for exhibition $0 (295-6)-CoXest) - 14-3 : -0-toolti ® operating severage = operating income contribution . - forom contribution the operating income is calculated by subtracting fed cost. → Tikrafove highest degre: de operating servisage exist in that option which is having highest fired cost. 50, Therefore, option will have highest operating deverage as in the option fixed cost is highest at $5,600

©: The payment plan which is having lowest ☺ fixed cast have lowest rick of loss for the organiaation because in this case, of organization is not able to sell ample quantity of tool set it does not have any fixed obligation - Therefore., option payment plan will be Considered as lowest visk d lose to the organizcilor. d. Let us take -> at x unit level group will be indifferent endor cption 1&2. > profit at x unit under option() = 14x – 5600 -> profit al . x unit under option@ = 19x-3800 So, i prostit at x einit Linder op lion (= profit at x unit endir option 14X-3600 = 12x-3800 2x = 1800 1800 The X-900-tool set

Revenue at 900 tool set = 900X20 - $18,000 son is at $18,000 revenue lovel group will be indifferent undey option on and option @. © Expected sales - 1000-seks. Profit under option O = 1000 X 14-5600 = 14,000 -5600 = $8;400 option under option = 1000 X 12 -- 3800 2000- 3800 = $81200 Profit usder option 3 - 4000811 = $11,000 ..Junior achievement should cheese option as it will give maximum profits