Melissa Valdez is planning to expand her clothing business by opening another st
ID: 2388641 • Letter: M
Question
Melissa Valdez is planning to expand her clothing business by opening another store. In planning for the new store, Melissa believes that selling prices and costs of the various products sold will be simlar to that of the existing store. In fact, she thinks that variable and fixed costs for the new store will be similar to that of the existing store, except that rent for the new store will be $300 per month more than the rent paid for the existing store. The followig information is available for the existing store for the year ended December 31, 2004:Sales $200,00
Variable cost 130,000
Fixed cost 48,800
Deteremine the sales required for the new store to break even. Determine the sales required for the new store to earn a profit of $20,000 per year (keep in mind that the $300 increase in rent is a monthly amount and the fixed cost of $48,000 is an annual amount)
Explanation / Answer
There seem to be typos in the question: Assuming Sales is 200,000 and fixed cost is mentioned 48,800 at one place and 48,000 at the bottom, I am assuming 48,000
For the old store:
Profit = Sales - (Fixed cost + variable cost)
= 200000 - 48000 - 130000
= 22000
Variable cost is proportional to sales = 130000/200000 = 65% of sales
For the new store, rent increases by 300 a month = 300*12 = 3600 a year
So new fixed cost = old fixed cost + increase in rent = 48000 + 3600 = 51600
New variable cost = 65% of new sales
At break even of new store, profit = 0
New sales = New Fixed Cost + New Variable cost
100%*New Sales = New Fixed Cost + 65%*New Sales
35%*New Sales = 51600
New Sales at break-even = $147,428.571
If I made wrong assumptions, please substitute the right values to obtain correct answer! :)
Please rate my answer!
Thanks in advance :)