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Challenge of the Month

puzzle

Manny’s Novelties imports pens and stationery from China to sell to big-box retailers. The company’s cost structure is as follows:

Sales:

Pens: Two-thirds of the company’s business with a 40% initial margin

Stationery: One-third of the business with a 30% initial margin

Customers receive 2% term discounts.

Operational chargebacks run 1.5 of sales.
Returns run 5% and are generally sold in secondary market at a loss of $300,000 below cost.

Fixed overhead is $500,000 per month.

Variable overhead is:
Warehouse and distribution: 4%

Sales commissions: 3%

Factor commissions: 1%

Interest: 2%

What is Manny’s break-even sales point? 

 

CHECK BELOW FOR THE ANSWER

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ANSWER

Initial Gross Margin – Pens -40%

Initial Gross Margin –Stationary 30%

Initial combined GP =36.7%

Margin dilution – 2%  discounts, 1.5% charge backs, 1% OP sales =4.5%

Variable costs =10%

Margin after dilution and variable costs =36.7%,less 4.5%, less 10%=22.2%

Fixed Overhead -$6M per annum

Break even =Fixed Overhead/Margin after dilution and variable costs

$6M/22.2%

Break Even = $27M

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