Problem:
Lava Rocks has fixed cost of $75,000 per month. Each model has the following identifiable sales price and variable material costs respectively.
Kona $6,500 $2,600
Hilo $3,900 $1,950
Paris $4,200 $1,890
When Lava Rocks sells a bike through a distributor they pay a sales commission of 10% of the sales price. It sells 70% of each bike model through its distributors. Assume that the fixed costs are allocated 40%, 30%, and 30% to the Kona, Hilo, and Paris models, respectively. Currently, the allocations are based on estimated design time for each model.
Calculate the contribution margin for each model. For purposes of this compuation, ignore the sales commission as a variable cost.
Calculate the MONTHLY break-even units for each model.
This year, Lava Rocks expects to sell 190 units of Kona, 320 units of Hilo, and 240 units of Paris(70% through distributors as expected). Prepare an income statement (with sales, each type of variable expense (material and sales commission), and fixed expenses) for Lava Rocks using these sales volumes.
The distributors are requesting a 15% commission on all models. Lava Rocks doesn't want to change the selling prices to absorb this increase. Compute by how much will it have to reduce other costs to make up for this request? What other counter-proposals could be suggested?
Lava Rocks is facing fierce competition from a new company, and management decides to lower the selling price of the Hilo by 10%. Also, they decide to take out advertising at a cost of $1,500 per month. This cost will be allocated only to the Hilo product. Recalculate their Break Even (for the Hilo model only) point given the new information. Ignore the change in commissions.