Ed Winslow is considering investing in a sandwich machine operation involving 50 sandwich machines located in various locations throughout the city. The machine manufacturer reports that similar sandwich machine routes have produced a sales volume ranging from 40 to 60 units per machine per month. The following information is made available to Winslow in evaluating the possible profitability of the operation.
1. An investment of $70,000 will be required. $10,000 for merchandise and $60,000 for the 50 machines.
2. The machines have a service life of five years and no salvage value at the end of that period. Depreciation will be computed on the straight-line basis.
3. Sandwiches sell for an average of $3,20 and will cost Winslow an average of $1,10 per unit to prepare.
4. Owners of the buildings in which the machines are located are paid a commission of 10 cents per sandwich sold.
5. One person will be hired to service the machines. The salary will be $1,800 per month.
6. Other expenses are estimated at $200 per month. These expenses do not vary with the number of units sold.
Instructions
a. Determine the unit contribution margin and the break-even volume in units and in dollars per month.
b. Draw a monthly cost-volume-profit graph for sales volume up to 60 units per machine per month.
c. What sales volume in units and in dollars per month will be necessary to produce an operating income equal to a 12 percent annual return on Winslow’s $70,000 investment? (Round to the nearest unit.)
d. Winslow is considering offering the building owners a flat rental of $45 per machine per month in lieu of the commission of 10 cents per unit sold. What effect would this change in commission arrangement have on his monthly break-even volume in terms of units?
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