Question

2. John has a plan to distribute soft drinks in jimma town for the next year in partnership with Moha
company. He signs a contract with the general manager of Moha soft drinks to operate at a profit
margin of 40 %. Other incremental costs including selling expenses incurred while selling the drinks
in jimma town. John includes these costs at the rate of 20% in addition to the cost of soft drinks.
Further, he incurs an estimated fixed cost of Birr 60,000per year in the operation.
a. What is the linear sales-cost equation
b. What is the breakeven volume of sales in Birr per year
c. What is the retailers profit if he sold soft drinks worth Birr 400,000in a year?
d. If john has sold two crates of soft drinks at Birr 50 each, find the total cost equation
interms of quantities

Answer 1

As per the question,

Profit margin $=40\%$

Selling expanses $=20\%$

Estimated fixed cost $=60,000$ per year

Let the cost price of the soft drink = x,

i) The linear sales cost equation,

$=x+\frac{40x}{100}+\frac{20x}{100}+60000$

$=x+0.4x +0.2x+60000$

$=1.6x+60000$

ii) Breakeven volume of sales in Birr per year $1.6x+60000/1$

iii) Retailer's profit on the soft drink $=\frac{400000\times 20}{100} =40,000 Rs.$