This is the practice exam question:
Simon Teguh is considering investing in a vending machine operation involving 20 vending machines located in various plants around the city. The machine manufacturer reports that similar vending machine routes have produced a sales volume ranging from 600 to 800 units per machine per month. The following information is made available to Teguh in evaluating the possible profitability of the operation.
- An investment of $45,000 will be required, $9,000 for merchandise and $36,000 for the 20 machines.
- The machines have a service life of five years and no salvage value at the end of that period. Depreciation will be computed on the straight-line basis.
- The merchandise (candy and soft drinks) retails for an average of 75 cents per unit and will cost Teguh an average of 25 cents per unit.
- Owners of the buildings in which the machines are located are paid a commission of 5 cents per unit of candy and soft drinks sold.
- One person will be hired to service the machines. The salary will be $1,500 per month.
- Other expenses are estimated at $600 per month. These expenses do not vary with the number of units sold.
a. Determine the unit contribution margin and the break-even volume in units and in dollars per month. (Do not round intermediate calculations. Round “Unit contribution margin” to 2 decimal places.)
c. What sales volume in units and in dollars per month will be necessary to produce an operating income equal to a 30 percent annual return on Teguh’s $45,000 investment? (Do not round intermediate calculations.)
d. Teguh is considering offering the building owners a flat rental of $30 per machine per month in lieu of the commission of 5 cents per unit sold. What effect would this change in commission arrangement have on his monthly break-even volume in terms of units? (Do not round intermediate calculations.)
I have come up with the following answers, which have been marked wrong. Please help me understand where I went wrong in my calculations so that I may get a better understanding when it is time for my exam.
A) CM: 0.75 – (.25+.05) =
Fixed costs 1500 + 600 =2100
break even in units 2100 / .45 =
Break even point in dollars 4667 X .75 =
C) sales volume (2100+13500) / .45 =
sales 34,667 X .75 =
D) New Variable (.3 – .05) = .25
New fixed cost 2100+(30 X 20) = 2700
break even units = 2700 / (0.75-.25)