Solution 4.13
 

 

a) How much sales revenue must be generated per week from the shop in order to break-even. (You may assume the trading year is 50 weeks) 

 To begin this question the information must be presented in a marginal costing format with costs classified according to whether they are fixed or variable and contribution calculated. Then calculating the average C/S ratio one can calculate the break-even point in sale value

 

Skis
Suits
Total

 

 
(168 x 100/120 )
 
(240x100/120)

Selling Price excl vat

140
200
340

 

Less variable costs per unit

 

Purchases excluding vat

70
120
190

 

Commissions

28
40
68

 

 

98
160
258

Contribution per unit
42
40
82

 

Fixed Costs

 

Wages & salaries

45,000

Estimated Overheads for the year

14,400

Loan Interest  (8% x  50,000)

4,000

Depreciation of fixed assets

10,000

 

73,400

 Weighted Average C/S (82/340) = 0.24          

Break-even point

 

 

Fixed cost

73,400

€305,833

C/S ratio

0.24

 

b) Calculate the amount of sales revenue to be generated per week if a return on equity of 20 percent is required

A return on capital of 20% equates to a net profit figure of €32,000 (160,000 x 20%)

Using the required profit formula one can calculate the amount of sales that can generate such as return.

Fixed costs + required profit  
73,400 + 32,000
 =    €439,167
C/S ratio  
.24
  

c) If an advertising campaign promoting a 15 per cent off deal on wet suits at the year-end is launched, how many extra wet suits need to be sold to cover the costs of the promotion which is estimated to cost €5,000.

 In this scenario one must calculate the new contribution per wetsuit after the 15% discount is taken into account. The costs of the promotion then divided by the new contribution to get the number of wets suits required to be sold to cover the additional fixed costs

 

 

 

 

 

 

 

 

 

Selling price  wet suits

 

 

(€200 x 85%)

170

 

 

Less variable  costs

 

 

 

 

 

 

 

Purchase

 

 

120

 

 

 

 

Commission

(170 x 20%)

34

154

 

 

Contribution per unit

 

 

 

16

 

 

 

 

 

 

 

 

 

 

 Fixed costs / Contribution per unit

 

5000 / 16 =

 313  wet suits

Thus the promotion and discount are only worthwhile if more that 313 wet suits are sold.