Question

Question #3: The manager of Walmart's in Arkansas is considering the possibility of providing flower delivery service. She hires you as consultant for this project. You suggested that Walmart should do some marketing research to understand the market needs. Walmart has conducted a survey, the major findings include: The estimated number of customers is 400. An average customer is willing to buy $30 worth of flowers per order and pay $5 for delivery. An average customer tends to place 10 flower orders per year. To ensure on-time delivery Walmart's needs to invest $30,000 on a new van, which will be straight line depreciated over 10 years with $0 salvage value. The expenses of gas, repair, maintenance, and other operating costs incurred by this van will be $2,000 a year. Staff compensation will cost $50,000 a year. Advertising, promotion and other sales expenses will cost $10,000 a year. The average variable cost of flowers is 60% of the flower sales. There is no variable cost assigned to delivery. Please answer the following questions: What is unit contribution (per customer per year)? (2) What is BEV in each year? (2)

Answer 1

1.

Unit contribution = Total contribution / Number of customers

Unit contribution = $56,000 / 400 = $140

2.

Break even value = Total fixed cost / contribution ratio

Contribution ratio = $56,000/140,000*100 = 40%

Break even value = $65,000 / 40% = $162,500

Working notes:

Sales revenue (400*$35*10)		$140,000
Less: Variable cost ($140,000*60%)		(84,000)
Contribution		56,000
Less: Fixed cost:
Depreciation on van ($30,000/10)	$3,000
Gas, repair, maintenance and other cost	2,000
Staff compensation	50,000
Advertising,promotion and other sales expenses	10,000
Total fixed cost		(65,000)
Net loss		$(9,000)