Problem: Ken’s Bicycle Shop sells mountain bikes. For purposes of a cost-volume-profit analysis, the shop owner has divided sales into two categories, as follows:
Product Category Sales Price Invoice Cost Sales Commissions
High quality $700 $375 20% of sales
Medium quality 500 235 20% of sales
The shop anticipates selling 500 bicycles, 300 of which will be medium quality. Annual fixed costs are $80,000. Ignore taxes.
Required to do:
Q1. What is the shop’s sales mix?
Q2. What is the shop’s break-even sales volume in dollars? (Hint: Find the break-even sales volume first.)
Q3. How many bicycles of each type must the firm sell to earn a target net income of $50,000?
Q4. Build your own spreadsheet. Prepare a computer spreadsheet to complete requirements (1)–(3) of this exercise. What if the market for high quality bikes drops 20 percent and Ken maintains market share?