Chartz 1-2-3 is a top-selling electronic spreadsheet product. Chartz is about to release version 5.0. It divides its customers into two groups: new customers and upgrade customers (those who previously purchased Chartz 1-2-3 4.0 or earlier versions). Although the same physical product is provided to each customer group, sizable differences exist in selling prices and variable marketing costs:
New Customers Upgrade Customers______
Selling price $195 $115
Variable costs
Manufacturing $15 $15
Marketing 50 65 20 35
Contribution margin $130 $ 80
The fixed costs of Chartz 1-2-3 5.0 are $16,500,000. The planned sales mix in units is 60% new customers and 40% upgrade customers.
Required:
1. What is the Chartz 1-2-3 5.0 breakeven point in units, assuming that the planned 60%>40% sales mix is attained?
2. If the sales mix is attained, what is the operating income when 170,000 total units are sold?
3. Show how the breakeven point in units changes with the following customer mixes:
a. New 40% and upgrade 60%
b. New 80% and upgrade 20%
Comment on the results.
The Janowski Company has three product lines of mugs—A, B, and C— with contribution margins of $5, $4, and $3, respectively. The president foresees sales of 168,000 units in the coming period, consisting of 24,000 units of A, 96,000 units of B, and 48,000 units of C. The company’s fixed costs for the period are $405,000.
Required:
1. What is the company’s breakeven point in units, assuming that the given sales mix is maintained?
2. If the sales mix is maintained, what is the total contribution margin when 168,000 units are sold? What is the operating income?
3. What would operating income be if the company sold 24,000 units of A, 48,000 units of B, and 96,000 units of C? What is the new breakeven point in units if these relationships persist in the next period?
4. Comparing the breakeven points in requirements 1 and 3, is it always better for a company to choose the sales mix that yields the lower breakeven point? Explain.
Genesee Music Society is a not-for-profit organization that brings guest artists to the community’s greater metropolitan area. The music society just bought a small concert hall in the center of town to house its performances. The lease payments on the concert hall are expected to be $4,000 per month. The organization pays its guest performers $1,800 per concert and anticipates corresponding ticket sales to be $4,500 per concert. The music society also incurs costs of approximately $1,000 per concert for marketing and advertising. The organization pays its artistic director $33,000 per year and expects to receive $30,000 in donations in addition to its ticket sales.
Required:
1. If the Genesee Music Society just breaks even, how many concerts does it hold?
2. In addition to the organization’s artistic director, the music society would like to hire a marketing director for $25,500 per year. What is the breakeven point? The music society anticipates that the addition of a marketing director would allow the organization to increase the number of concerts to 41 per year. What is the music society’s operating income/(loss) if it hires the new marketing director?
3. The music society expects to receive a grant that would provide the organization with an additional $17,000 toward the payment of the marketing director’s salary. What is the breakeven point if the music society hires the marketing director and receives the grant?
McCarthy Men’s Clothing’s revenues and cost data for 2014 are as follows:
Revenues $500,000
Cost of goods sold 250,000
Gross margin 250,000
Operating costs:
Salaries fixed $160,000
Sales commissions (11% of sales) 55,000
Depreciation of equipment and fixtures 15,000
Store rent ($4,000 per month) 48,000
Other operating costs 40,000 318,000
Operating income (loss) $(68,000)
McCarthy Men’s Clothing’s revenues and cost data for 2014 are as follows:
Revenues $500,000
Cost of goods sold 250,000
Gross margin 250,000
Operating costs:
Salaries fixed $160,000
Sales commissions (11% of sales) 55,000
Depreciation of equipment and fixtures 15,000
Store rent ($4,000 per month) 48,000
Other operating costs 40,000 318,000
Operating income (loss) $(68,000)
Mr. McCarthy, the owner of the store, is unhappy with the operating results. An analysis of other operating costs reveals that it includes $35,000 variable costs, which vary with sales volume, and $5,000 (fixed) costs.
Required:
1. Compute the contribution margin of McCarthy Men’s Clothing.
2. Compute the contribution margin percentage.
3. Mr. McCarthy estimates that he can increase units sold, and hence revenues by 20% by incurring additional advertising costs of $12,000. Calculate the impact of the additional advertising costs on operating income.
4. What other actions can Mr. McCarthy take to improve operating income?