Question

Breakeven analysis Molly Jasper and her sister, Caitlin Peters, got into the novelties business almost by accident. Molly, a talented sculptor, often made little figurines as gifts for friends. Occasionally, she and Caitlin would set up a booth at a crafts fair and sell a few of the figurines along with jewelry that Caitlin made. Little by little, demand for the figurines, now called Mollycaits, grew, and the sisters began to reproduce some of the favorites in resin, using molds of the originals. The day came when a buyer for a major department store offered them a contract to produce 1,460 figurines of various designs for $9,700. Molly and Caitlin realized that it was time to get down to business. To make bookkeeping simpler, Molly had priced all of the figurines at $7.89. Variable operating costs amounted to an average of $6.15 per unit. To produce the order, Molly and Caitlin would have to rent industrial facilities for a month, which would cost them $4,100. a. Calculate Mollycaits' operating breakeven point b. Calculate Mollycaits' EBIT on the department store order c. If Molly renegotiates the contract at a price of $10.21 per figurine, what will the EBIT be? d. If the store refuses to pay more than $7.89 per unit but is willing to negotiate quantity, what quantity of figurines will result in an EBIT of $4,000? e. At this time, Mollycaits come in 15 different varieties. Whereas the average variable cost per unit is $6.15, the actual cost varies from unit to unit. What recommendation would you have for Molly and Caitlin with regard to pricing and/or the numbers and types of units that they offer for sale?

Answer 1

Answer a

BEP Sales

In quantity =Fixed cost/contribution per unit

=$4100/$1.74

=2356 units

In value= fixed cost/PV ratio

=$4100/22.05%

=$18594

Working note

Sales = $7.89

(-) variable cost =$6.15

(=)contributin=$1.74

PV ratio=contribution/selling price*100

Answer b

EBIT= Contribution - fixed cost

=$1.74-$2.808

=-$1.068

Working note

Fixed cost per unit=$4100/1460

=$2.808

Answer C

If contract price=$10.21

Sales=$10.21

(-) Variable cost=$6.15

(=) Contribution =$4.06

(-)Fixed cost=$2.808

(=)EBIT=$1.252

answer d

Desired profit= (sales*PV ratio) -fixed cost

$4000=(Sales*22.05%)-$4100

$8100=sales*22.05%

Sales=$8100/22.05%

=$36734.69

Sales in units=$36734.69/$7.89

=4655 units