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An Analysis of Kevin's Bicycle Shop

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.

Answer the following:
a. What is the shop's sales mix?
b. What is the shop's break-even sales volume in dollars? (Hint: Find the break-even sales volume first.)
c. How many bicycles of each type must the firm sell to earn a target net income of $50,000?
d. Build your own spreadsheet. Prepare a computer spreadsheet to complete requirements (a)-(c) of this exercise. What if the market for high quality bikes drops 20 percent and Ken maintains market share?

Solution Preview

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 ...

Solution Summary

This solution is comprised of a detailed, step by step analysis which exemplifies how to solve for the shop's sales mix and break-even point. An Excel document is attached which provides the solutions for parts c and d.

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