Question

Use information in Exhibit 5, attempt to compute the breakeven revenue for three different conditions: (1) assumes Marilyn wants to cover only the annual fixed costs through operations, and without paying a salary for herself; (2) assumes Marilyn wants to cover the annual fixed costs, and charges a modest $30,000 in salary and benefits, to cover her cost of inventory, her previous year’s loss and some other personal expenses; (3) assumes Marilyn can manage to cut the Cost of Sales by 10%, and she wants to cover the annual fixed costs and charges a modest $30,000 in salary and benefits

Chocolates Income Statement (Accountant's unaudited estimate for Year BIT 5 Cowgirl Chocolates Case Twenty One Cowgirl Chocolates 521 Year 2000) REVENUES Product Sales Miscellaneous Income %of Sales Net Sales Totar cales (shipped portion of chocolate, Coaramel, packaging, and printing) Gross Margin OPERATING EXPENSES: $26,000 $ 4,046 $30,046 100% $14,197 $15,849 47% 53% rtising & Promotions: Trade Shows Web site Charitable Contributions Subtotal 6,423 1,390 200 Travel Miscellaneous Payroll Expense/Benefits @ 20% 8,013 5,786 1,071 27% 1996 4% (no personnel charges) (no current owner ship of PPE) (not included in income statement) Depreciation on Plant and Equipment 0% ing Inventory (finished and unfinished) 0% Shipping& Postage Insurance, Lawyers, Professional Memberships Brokers Office Expenses (phone, supplies, photography, 4,046 13% 437 540 1.5% 1.8% taxes Total Operating Expenses Grand Total: All Expenses Profit before Interest & Taxes interest Expense (short term) nterest Expense (long term) Taxes Incurred (Credit @ 18%, approximate tax rate) Net Profit after Taxes Net Profit after Taxes/Ssles 2,131 22,024 $36,221 7010 ($6,175) [see note] ($1,124) ($5,051.15) 17% in nventory build-up approximates the cash needed ($23,023-see Exhibit 4) to cover the total expenses for year 2000. Note: The ($6,175) loss plus ths 1

Answer 1

(1) assumes Marilyn wants to cover only the annual fixed costs through operations, and without paying a salary for herself;

Let's assume the break even revenue to be R. Hence, gross margin, GM = 53% of Revenue = 0.53R

Fixed costs to be covered, FC = Annual operating expenses = 22,024

Hence, at break even revenue, profits = GM - FC = 0

Or, 0.53R - 22,024 = 0

Hence, R = 22,024 / 0.53 = $  41,555

(2) assumes Marilyn wants to cover the annual fixed costs, and charges a modest $30,000 in salary and benefits, to cover her cost of inventory, her previous year’s loss and some other personal expenses;

FC = 22,024 + 30,000 = 52,024

Hence, the equation now is: 0.53R - 52,024 = 0

Hence, R = 52,024 / 0.53 = $  98,158

(3) assumes Marilyn can manage to cut the Cost of Sales by 10%, and she wants to cover the annual fixed costs and charges a modest $30,000 in salary and benefits

Cost of sales now = 14,197 x (1 - 10%) =  12,777

Cost of sales as % of revenue = 12,777 / 30,046 = 42.53%

Hence, GM now = (1 - 42.53%) x R = 0.5747R

The equation now is: 0.5747R - 52,024 = 0

Hence, R = 52,024 / 0.5747 = $  90,517