Question

1) Query Company sells pillows for $25.00 each. The manufacturing cost, all variable, is $10 per pillow. The company is planning on renting an exhibition booth for both display and selling purposes at the annual crafts and art convention. The convention coordinator allows three options for each participating company. They are: (15 pts) paying a fixed booth fee of $5,010, or paying an $4,000 fee plus 10% of revenue made at the convention, or paying 20% of revenue made at the convention. Required: Compute the breakeven sales in pillows of each option. Which option should Query Company choose, assuming sales are expected to be 800 pillows? a.

Answer 1

a)Calculation of Variable cost per unit and total fixed cost:

Option	Variable cost per unit	Fixed cost
1	10	5010
2	10 manufacturing cost+ (25*10% )commission 10 + 2.5 12.5	4000
3	10 manufacturing cost+ (25*20% )commission 10 + 5 15	0

Calculation of breakeven point:

AT breakeven ,there is no profit no loss .

Option1)

Breakeven point = Fixed cost /(price- variable cost)

               = 5010 /(25-10)

               = 5010 /15

               = 334 pillows

Option 2)

Breakeven point = Fixed cost /(price- variable cost)

                = 4000 /(25 -12.5)

                = 4000 / 12.5

                = 320 pillows

Option 3 )Breakeven point = Fixed cost /(price- variable cost)

                                    = 0/(25- 15)

                                     = 0/ 10

                                   = 0 pillows

b)Lowest the breakeven point ,higher is the chances of an option to be selected .

Since breakeven point of option 3 is lowest ,it should be selected when 800 pillows are to be sold as it will result in highest profit

Option 3 is to be selected..

	1	2	3
Sales (800*25)	20000	20000	20000
less:variable cost	-8000   (800*10)	-10000 (800*12.5)	-12000 (800*15)
contribution margin	12000	10000	8000
less:fixed cost	-5010	-4000	0
Profit	6990	6000	8000