PROBLEM 4–24 Break-Even and Target Profit Analysis [LO5, LO6]

The Marbury Stein Shop sells steins from all parts of the world. The owner of the shop, Clint Marbury, is thinking of expanding his operations by hiring local college and university stu- dents, on a commission basis, to sell steins at the local post-secondary schools. The steins will bear the school emblem.

These steins must be ordered from the manufacturer three months in advance, and be- cause of the unique emblem of each school, they cannot be returned. The steins would cost Marbury $15 each, with a minimum order of 200 steins. Any additional steins would have to be ordered in increments of 50.

Since Marbury’s plan would not require any additional facilities, the only costs associated with the project would be the cost of the steins and the cost of sales commissions. The selling price of the steins would be $30 each. Marbury would pay the students a commission of $6 for each stein sold.

 

 

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Required:

1.               To make the project worth his time, Marbury requires a $7,200 operating income for the first six months of the venture. What level of sales in units and dollars is required to attain this target operating income? Show all computations.

2.               What level of sales dollars is required to generate $12,000 in after-tax operating income if the tax rate is 20%?

3.               Assume that the venture is undertaken and an order is placed for 200 steins. What is Marbury’s break-even point in units and in sales dollars? Show all computations, and ex- plain the reasoning behind your answer.