Wanda wants to open a health-food store. Her monthly expenses are rent $3,500, utilities of
$1,000, insurance of $500, and payroll of $4,250. She estimates that her cost of goods is
approximately 65 percent of sales. Wanda would like to make $4,000 a month for herself.
a. What is Wanda’s contribution margin?
b. How much does she need in monthly sales to break even?
c. How much does she need in monthly sales to make a profit of $4,000?
d. Construct a break-even chart for Wanda’s health-food store.
To answer these questions, we will first calculate Wanda's contribution margin, which is the difference between her sales revenue and variable costs. Then we will determine the monthly sales required to break even and make a profit of $4,000. Finally, we will construct a break-even chart.
a. To calculate Wanda's contribution margin, we need to determine her variable costs. Variable costs are the costs that vary with the level of sales, such as the cost of goods. Since Wanda estimates that her cost of goods is approximately 65% of sales, we can calculate her variable costs as follows:
Variable Costs = Cost of Goods = 65% of Sales
b. To calculate the monthly sales required to break even, we need to consider Wanda's fixed costs. Fixed costs are the costs that do not vary with the level of sales, such as rent, utilities, insurance, and payroll.
Total Fixed Costs = Rent + Utilities + Insurance + Payroll
Once we have the total fixed costs and the contribution margin, we can use the following formula to calculate the break-even sales:
Break-Even Sales = Total Fixed Costs / Contribution Margin
c. To determine the monthly sales required to make a profit of $4,000, we need to add her desired monthly profit to the total fixed costs.
Total Costs for Desired Profit = Total Fixed Costs + Desired Profit
Once we have the total costs for the desired profit and the contribution margin, we can use the same formula as in (b) to calculate the required sales.
d. To construct a break-even chart, we plot the total costs (fixed costs + variable costs) and the sales revenue on a graph. The break-even point is where the total costs intersect with the sales revenue.
Let's calculate the values for Wanda's health-food store:
a. Contribution Margin:
Wanda's contribution margin is the difference between her sales revenue and variable costs. Since we know that her variable costs are 65% of sales, we can calculate the contribution margin as follows:
Contribution Margin = 1 - Variable Costs
Contribution Margin = 1 - 65%
Contribution Margin = 35%
b. Break-Even Sales:
To calculate the break-even sales, we need to know Wanda's total fixed costs. Let's assume that her total fixed costs are:
Rent = $3,500
Utilities = $1,000
Insurance = $500
Payroll = $4,250
Total Fixed Costs = $3,500 + $1,000 + $500 + $4,250
Total Fixed Costs = $9,250
Now we can use the following formula to calculate the break-even sales:
Break-Even Sales = Total Fixed Costs / Contribution Margin
Break-Even Sales = $9,250 / 35%
Break-Even Sales ≈ $26,429
Therefore, Wanda needs approximately $26,429 in monthly sales to break even.
c. Sales for Desired Profit:
To calculate the sales required to make a profit of $4,000, we need to add the desired profit to the total fixed costs:
Total Costs for Desired Profit = Total Fixed Costs + Desired Profit
Total Costs for Desired Profit = $9,250 + $4,000
Total Costs for Desired Profit = $13,250
Now we can use the same formula as in (b) to calculate the required sales:
Required Sales = Total Costs for Desired Profit / Contribution Margin
Required Sales = $13,250 / 35%
Required Sales ≈ $37,857
Therefore, Wanda needs approximately $37,857 in monthly sales to make a profit of $4,000.
d. Break-Even Chart:
To construct a break-even chart, we need to plot the total costs (fixed costs + variable costs) and the sales revenue on a graph. The break-even point is where the total costs intersect with the sales revenue. The X-axis represents the sales revenue, and the Y-axis represents the total costs. We can plot the total costs as a straight line starting from the fixed costs and increasing with the increase in sales. The sales revenue can be plotted as a line starting from the origin (0,0) and increasing with the increase in sales. The break-even point is the intersection of these two lines.
Please note that without knowing the specific sales revenue for each level, it is not possible to provide an exact break-even chart. However, using the calculated values and assumptions mentioned above, you can create a simplified break-even chart.