Question

Express Delivery is a rapidly growing delivery service. Last year, 80% of its revenue came from the delivery of mailing “pouches” and small, standardized delivery boxes (which provides a 20% contribution margin). The other 20% of its revenue came from delivering non-standardized boxes (which provides a 70% contribution margin). With the rapid growth of Internet retail sales, Express believes that there are great opportunities for growth in the delivery of non-standardized boxes. The company has fixed costs of $13,383,000.

(a) What is the company’s break-even point in total sales dollars? At the break-even point, how much of the company’s sales are provided by each type of service?

(b) The company’s management would like to hold its fixed costs constant but shift its sales mix so that 60% of its revenue comes from the delivery of non-standardized boxes and the remainder from pouches and small boxes. If this were to occur, what would be the company’s break-even sales, and what amount of sales would be provided by each service type?

Answer 1

a

Weighted average contribution margin =(80%*20%)+(20%*70%)= 30%

Total break-even sales = Fixed costs/Weighted average contribution margin

Total break-even sales = 13383000/30%= $44610000

Sale of mail pouches and small boxes = 44610000*80%= $35688000

Sale of non-standardized boxes = 44610000*20%= $8922000

b

Weighted average contribution margin =(40%*20%)+(60%*70%)= 50%

Total break-even sales = 13383000/50%= $26766000

Sale of mail pouches and small boxes = 26766000*40%= $10706400

Sale of non-standardized boxes = 26766000*60%= $16059600