Question

Mark Leahy is considering opening a greeting card shop.  Mr. Leahy estimates that the rental cost of the store will be $550 per month.  Other relevant costs include:

Greeting cards	$0.50 per card sold
Telephone services	$95 per month
Electricity	$200 per month
Miscellaneous fixed costs	$150 per month
Miscellaneous variable cost	$0.10 per card sold

Mr. Leahy intends to pay salaries to himself and one part-time store clerk of $1,200 per month, regardless of the number of cards sold.  

At present, he estimates an average greeting card selling price of $2 per card.

Required

1. Assuming Mr. Leahy opens the store in October 20x1 and, that month, he sells 3,000 greeting cards, prepare a contribution income statement for the first month of operations.
2. Using your information from the Contribution Income Statement, compute the Leahy Greeting Card Company’s monthly break-even point in sales $ and in unit sales.
3. If the greeting card store’s unit sales increase by 10%, by how much will operating profit increase?  Also, at the new sales level, i.e. with the 10% increase, compute the store’s monthly:

1. Contribution margin
2. Total operating profit
3. Break-even units and sales dollars

4. Ignoring part c above, suppose the greeting card company pays $150 for advertising with the expectation of increasing unit sales by 15%, at this new sales level, compute the store’s new monthly:

1. Contribution margin
2. Operating profit
3. Break-even units and sales

Answer 1

Mark leahy contribution income statement for the month Less : 6000$ 1500$ 300$ 4200$ 6600$ 1650$ 330$ 4620$ Less: Sales revenue (3000*2$) variable cost of goods sold(3000*0.50$) miscellaneous variable cost (3000*0.10$) Contribution Margin Fixed cost Rent per month telephone service per month electricity salary to himself & Part time clerk miscellaneous fixed cost operating profit increase in sales unit by 10% sales revenue (3000+10% increase (3300*2$)) Less : variable cost of goods sold(3300*0.50$) Less: miscellaneous variable cost (3300*0.10$) Contribution Margin Less: Fixed cost Less : Rent per month Less: telephone service per month Less: electricity Less: salary to himself & Part time clerk Less : miscellaneous fixed cost operating profit Less : Less: Less : Less : Less: Less: 550$ 95$ 550$ 95$ 200$ 1200$ 150$ 2005$ 200$ 1200$ 150$ 2425$ fixed cost = 550$+95$+200$+1200$+150$ = 2195$ variable cost per unit = 0.50$+0.10$ = 0.60$ increase in operating profit = 2425-2005 2005 = 21% break even point= (in units) fixed costs selling price per unit - variable cost per unit break even point = (in units fixed costs selling price per unit - variable cost per unit break even point = (in units) 2195$ 2$ -0.60$ break even point = (in units) 2195$ 2$ -0.60$ 2195$/1.4$=1568 units 2195$/1.4$=1568 units break even point = (in sales) fixed costs contribution margin ratio break even point = (in sales) fixed costs contribution margin ratio contribution margin ratio = contribution/sales = 4200/6000= 0.7 contribution margin ratio = contribution/sales = 4620/6600 = 0.7 break even point = (in sales) 2195$ 0.7$ break even point (in sales) 2195$ 0.7$ =3136 $ =3136 $ part d (when sales units increases by 15%) contribution income statement for the month Less: Less: 6900$ 1725$ 345$ 550$ Sales revenue (3450*2$) (3000+15%) variable cost of goods sold(3450*0.50$) miscellaneous variable cost (3450*0.10$) Contribution Margin Fixed cost Rent per month telephone service per month electricity salary to himself & Part time clerk Advertising expenses miscellaneous fixed cost operating profit Less: Less: Less: Less: Less: Less: Less: 95$ 200$ 1200$ 150$ 150$ 2485$ fixed cost = 550$+95$+200$+1200$+150$ +150$ = 2345$ variable cost per unit = 0.50$+0.10$ = 0.60$ break even point = (in units) fixed costs selling price per unit - variable cost per unit break even point = (in units) 2345$ 2$ -0.60$ 2345$/1.4$=1675 units break even point = (in sales) fixed costs contribution margin ratio contribution margin ratio = contribution/sales = 4830/6900 = 0.7 break even point = (in sales) 2345$ 0.7$ =3350 $