Question

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 Caitlan would setup a booth at a crafts fair and sell a few of the figurines along with jewelry that Caitlan made. The day came when a buyer for a major department store offered them a contract to produce 1,500 figurines of various designs for $10,000. To make bookkeeping simpler, Molly had priced all the figurines at $8.00 each. Variable operating costs amounted to an average of $6.00 per unit. To produce the the order, Molly and Caitlan would have to rent industrial facilties for a month, which would cost them $4,000.

A. Calculate Mollycaits' operating breakeven point.

B. Calculate Mollycaits' EBIT on the department store order.

C. If Molly renegotiates the contracts at a price of $10.00 per figurine, what will the EBIT be?

D. If the store refuses to pay more than $8.00 per unit but is willing to negotiate quanity, what quanity 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 $6.00, the actualy cost varies from unit to unit. What reccomendation would you have for Molly and Caitlan with regard to pricing and the numbers and types of units that they offer for sale?

Answer 1

Answer:

a. 2.000 pieces

b. Loss of 1.000

c. EBIT = 2.000

d. 2125

e.Number of units should be less. Ideally, she should produce 1 type of unit which costs minimum. However, this might effect the order quantity.

Explanation:

a) 8 * X = 6*X + 4000

X = 2000

Thus, the breakeven points is 2000 pieces

b) revenue on current order = 1500 * 8 = 12000

Expense = 1500 * 6 + 4000 = 13000

Thus loss of $1000.

c) revenue = 1500 * 10 = 15000.

Expense = 13000

EBIT = 2000

d) EBIT of 4000 can be achieved when revenue = 13000 + 4000 = 17000

Thus quantity should be = 17000/8 = 2125

e) Number of units should be less. Ideally, she should produce 1 type of unit which costs minimum. However, this might effect the order quantity.