Cost,Volume,Profit Analysis
Leslie Mittelberg is considering the wholesaling of a leather handbag from Kenya.She must travel to Kenya to check on quality and transportation.The trip will cost $3000.The cost of the handbag is $10 and shipping to the United States can occur through the postal system for $2 per handbag or through a freight company which will ship a container that can hold up to a 1000 handbags at a cost of $1000.The freight company will charge $1000 even if less than 1000 handbags are shipped.Leslie will try to sell the handbags to retailers for $20.Assume there are no other costs and benefits.
Required:
a.What is the break-even point if shipping is through the postal system?
b.How many units must be sold if Leslie uses the freight company and she wants to have a profit of $1000?
c.At what output level would the two shipping methods yield the same profit?
d.Suppose a large discount store asks to buy an additional 1000 handbags beyond normal sales.Which shipping method should be used and what is the minimum sales price Leslie should consider in selling those 1000 handbags?

Question

Quizplus · Accepted Answer

The Answer is Solution to Cost,Volume,Profit Analysis (20 minutes)
a.Through the postal system,the variable cost per unit is $10 + $2 or $12.Therefore,the break-even point is:
$3,000/($20 - $12)= 375 handbags
b.The fixed costs through the freight company are $3,000 + $1,000 or $4,000 if fewer than 1,000 bags are purchased.The variable cost is only the $10 purchase cost.To make a profit of $1,000,Leslie must buy and sell:
($4,000 + $1,000)/($20 - $10)= 500 handbags
c.The two methods would yield the same profit for the following quantity of handbags:

Solution to Cost,Volume,Profit Analysis (20 minutes) a.Through the postal system,the variable cost per unit is $10 + $2 or $12.Therefore,the break-even point is: $3,000/($20 - $12)= 375 handbags b.The fixed costs through the freight company are $3,000 + $1,000 or $4,000 if fewer than 1,000 bags are purchased.The variable cost is only the $10 purchase cost.To make a profit of $1,000,Leslie must buy and sell: ($4,000 + $1,000)/($20 - $10)= 500 handbags c.The two methods would yield the same profit for the following quantity of handbags: d.The 1,000 handbags will be most cheaply transported by container.Leslie's trip expenses of $3,000 will occur anyway,so they are not relevant for pricing the special order.The incremental cost of the additional 1,000 handbags is the cost of the container ($1,000)and the purchase cost of the handbags ($10/handbag)(1,000 handbags)or a total of $11,000.If the special order has no other effect on long term sales,then Leslie should accept a sales price above the $11,000 incremental cost.

d.The 1,000 handbags will be most cheaply transported by container.Leslie's trip expenses of $3,000 will occur anyway,so they are not relevant for pricing the special order.The incremental cost of the additional 1,000 handbags is the cost of the container ($1,000)and the purchase cost of the handbags ($10/handbag)(1,000 handbags)or a total of $11,000.If the special order has no other effect on long term sales,then Leslie should accept a sales price above the $11,000 incremental cost.

Cost,Volume,Profit Analysis Leslie Mittelberg Is Considering the Wholesaling of a Leather Handbag