3-37

1.
Monthly Number of order Cost of current system
300,000 $ 2,000,000 + 55(300,000) = $ 18,500,000
500,000 $ 2,000,000 + 55(500,000) = $ 29,500,000
700,000 $ 2,000,000 + 55(700,000) = $ 40,500,000

Monthly Number of order Cost of a partially automated B2B

300,000 $ 6,000,000 + 45(300,000) = $ 19,500,000
500,000 $ 6,000,000 + 45(500,000) = $ 28,500,000
700,000 $ 6,000,000 + 45(700,000) = $ 37,500,000

Monthly Number of order Cost of a fully automated B2B

300,000 $ 14,000,000 + 25(300,000) = $ 21,500,000
500,000 $ 14,000,000 + 25(500,000) = $ 26,500,000
700,000 $ 14,000,000 + 25(700,000) = $ 31,500,000

2. Current System’s Expected Cost

= $ 18,500,000 x 0.25 + 29,500,000 x 0.45 + 40,500,000 x 0.3 = $30,050,000

A Partially automated B2B’s Expected Cost

= $ 19,500,000 x 0.25 + 28,500,000 x 0.45 + 37,500,000 x 0.3 = $ 28,950,000

A fully automated B2B’s Expected Cost

= $ 21,500,000 x 0.25 + 26,500,000 x 0.45 + 31,500,000 x 0.3 = $ 26,750,000

3. Kindmart should consider the impact of the different systems on its relationship with
suppliers. The interface with Kindmart’s system may require that suppliers also
update their systems. This could cause some suppliers to raise the cost of their
merchandise. It could force other suppliers to drop out of Kindmart’s supply chain
because the cost of the system change would be prohibitive. Kindmart may also
want to consider other factors such as the reliability of different systems and the
effect on employee morale if employees have to be laid off as it automates its
systems.
3-48

1. (using sales agents)

Contribution margin = $ 35,200,000-13,375,000-7,040,000 =$ 14,785,000
Operating Income = $ 14,785,000-4,125,000-4,025,000 = $6,635,000
Contribution margin percentage = $ 14,785,000/35,200,000 = 42%
Breakeven Revenues = $(4,125,000+4,025,000)/42% = $19,403,449
Degree of operating leverage = $ 14,785,000/6,635,000 = 2.23

(using own sales force)

Contribution margin = $ 35,200,000-13,375,000-3,520,000 = $ 18,305,000
Operating Income = $18,305,000-4125,000-7,545,000 = $6,635,000
Contribution margin percentage = $ 18,305,000/35,200,000 = 52%
Breakeven Revenues = $ (4,125,000+7,545,000)/52% = $22,441,082
Degree of operating leverage = $ 18,305,000/6,635,000 = 2.76

2. The calculations indicate that at sales of $35,200,000, a percentage change in sales

and contribution margin will result in 2.23 times that percentage change in operating
income if Zahner continues to use sales agents and 2.76 times that percentage
change in operating income if Zahner employs its own sales staff. The higher
contribution margin per dollar of sales and higher fixed costs gives Zahner more
operating leverage, that is, greater benefits (increases in operating income) if
revenues increase but greater risks (decreases in operating income) if revenues
decrease. Zahner also needs to consider the skill levels and incentives under the two
alternatives. Sales agents have more incentive compensation and hence may be
more motivated to increase sales. On the other hand, Zahner’s own sales force may
be more knowledgeable and skilled in selling the company’s products. That is, the
sales volume itself will be affected by who sells and by the nature of the
compensation plan.

3. Variable cost of marketing = 35,200,000*0.15 = $5,280,000

Fixed marketing cost = $7,545,000
Operating Income
X - 0.52X - 4,125,000 – 0.15X – 7,545,000 = 6,635,000
X - 0.52X - 0.15X = 6,635,000 + 7,545,000 + 4,125,000
0.33X = 18,305,000
X = $ 55,469,697
3-49

1. Sales of A, B, and C are in ratio 20,000 : 100,000 : 80,000. So for every 1 unit of A,
(100,000 ÷ 20,000) = 5 units of B are sold, and (80,000 ÷ 20,000) = 4 units of C are
sold.

Contribution margin of the bundle = 1 × $3 + 5 × $2 + 4 × $1 = $3 + $10 + $4 = $17

Breakeven point in bundles = $255,000/17 = 15,000 bundles
Breakeven point in units is:
Product A: 15,000 x 1 = 15,000 units
Product B: 15,000 x 5 = 75,000 units
Product C: 15,000 X 4 = 60,000 units
Total = 15,000 + 75,000 + 60,000 = 150,000 units

2. Product A: 20,000 X 3 = $60,000

Product B: 100,000 x 2 = $200,000
Product C: 80,000 x 1 = $80,000
Contribution Margin = $ 60,000+200,000+80,000 =$340,000
Operating Income = $ 340,000 – 255,000 = $85,000

3. Sales of A, B, and C are in ratio 20,000 : 80,000 : 100,000. So for every 1 unit of A,
(80,000 ÷ 20,000) = 4 units of B and (100,000 ÷ 20,000) = 5 units of C are sold.

Contribution margin of the bundle = 1 × $3 + 4 × $2 + 5 × $1 = $3 + $8 + $5 = $16

Breakeven point in bundles = $255,000/16 = 15,938 bundles (rounded up)

Breakeven point in units is:

Product A: 15,938 x 1 = 15,938 units
Product B: 15,938 x 4 = 63,752 units
Product C: 15,938 X 5 = 79,690 units
Total = 15,938 + 63,752 + 79,690 = 159,380 units

Breakeven point increases because the new mix contains less of the higher
contribution margin per unit, product B, and more of the lower contribution margin
per unit, product C.