Question

Johnson Delivery is a rapidly growing delivery service. Last year, 80% of its revenue came from the delivery of mailing "pouches" and small, standarized delivery boxes (which provides a 20% contribution margin). The other 20% of its revenue came from delivering non-standardized boxes (which provides a 70% contribution margin). With the rapid growth of internet sales, Express believes that there are great opportunities for growth in the delivery of non-standarized boxes. The company has fixed costs of $12,120,000

(a) What is the company's break-even point in total sales dollars? At the break-even point, how much of the company's sales are provided by each types of service?

Total break-even sales $_____________

Sale of mail pouches and small boxes $___________________

Sale of non-standard boxes $__________________

(b) The company's management would like to hold its fixed costs constant but shift its sales mix so that 60% of its revenue comes from the delivery of non-standarized boxes and the remainder from pouches and small boxes. If this were to occur, what would be the company's break-even sales, and what amount of sales would be provided by each service type?

Total break-even sales $_________________

Sale of mail pouches and small boxes $___________________

Sales of non-standarized boxes $________________________

Answer 1

Johnson Delivery have two product segments. One is Sale of small standarized boxes and another is Sale of non-standarized boxes. For computing Break even sales we need to calculate weighted average of contribution margin as follows. (Sale % of Standarized delivery pouches (X) Contribution margin % of Std. Delivery pouches) +(Sale % of Non Standarized delivery boxes (X) Contribution margin % of Non Std. Delivery boxes) Weighted average of Contribution margin= = (80% X 20%) + (20% X 70%) Weighted average of Contribution margin= 30% Now, Break even sales (in $)= Total fixed cost Weighted average of Contribution margin Break even sales (in $)= $1,21,20,000 30%

Therefore, Total break even sales (in $)= $ 4,04,00,000 At break even point each product will provide following amount of sales: Sale of mail pouches and small boxes $= Total BEP Sales X % of Existing Sales = $4,04,00,000 X 80% = $ 3,23,20,000 Sale of non-standard boxes $= Total BEP Sales X % of Existing Sales = $4,04,00,000 X 20% = $ 80,80,000

b) With new sales mix Total break even sales is calculated as follows: (Sale % of Standarized delivery pouches (X) Contribution margin % of Std. Delivery pouches) +(Sale % of Non Weighted average of Contribution margin= Standarized delivery boxes (X) Contribution margin % of Non Std. Delivery boxes) = (40% X 20%) + (60% X 70%) Weighted average of Contribution margin= 50% Now, Break even sales (in $)= Total fixed cost Weighted average of Contribution margin Break even sales (in $)= $1,21,20,000 50%

Therefore, Total break even sales in $)= $ 2,42,40,000 At break even point each product will provide following amount of sales: Sale of mail pouches and small boxes $= Total BEP Sales X % of Revised Sales = $2,42,40,000 X 40% 96,96,000 Sale of non-standard boxes $= Total BEP Sales X % of Existing Sales = $2,42,40,000 X 60% = $ 1,45,44,000