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Break-Even & Profit

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The Last Outpost is a tourist stop in a western resort community. Kerry Yost, the owner of the shop, sells hand-woven blankets for an average price of $30 per blanket. Kerry buys the blankets from weavers at an average cost of $21. In addition, he has selling expenses of $3 per blanket. Kerry rents the building for $300 per month and pays one employee a fixed salary of $500 per month.

1. Determine the number of blankets Kerry must sell to break even.
2. Determine the number of blankets Kerry must sell to generate a profit of $1,000 per month.
3. Assume that Kerry can produce and sell his own blankets at a total variable cost of $16 per blanket, but that he would need to hire one additional employee at a monthly salary of $600.
a. Determine the number of blankets Kerry must sell to break even.
b. Determine the number of blankets Kerry must sell to generate a profit of $1,000 per month.

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Solution Summary

All parts of the question are answered in clear, concise calculations with a few words to clarify.

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Contribution Margin per blanket= Selling Price - (Cost of selling)= 30- (21+ 3)= $6 per blanket

Fixed Costs= 300+ 500= $800

1. Determine the number of blankets Kerry must sell to break even.

Solution: Total Fixed cost/ contribution Margin= 800/6= 133.33 or 134 ...

Solution provided by:
Sheetal Jain, PGDM
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  • BComm, University of Delhi
  • Post Graduate Diploma in Management (Equivalent to MBA), All India Management Association
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