Reference no: EM132941846

John got into the novelties business almost by accident. He often made little figurines as gifts for friends. Occasionally, he would set up a booth at a flea market and sell the figurines along with jewellery. Little by little, demand for the figurines, now called jollies, grew and he began to reproduce some of the favourite jollies in resin, using moulds of the originals. The day came when a buyer for a major department store offered him a contract to produce 1 500 figurines of various designs for R10 000,00. John realised that it was time to get down to business. The sales price per figurine is R8,00 and the variable costs amount to an average of R6,00 per unit. To produce the order, John would have to rent an industrial facility for a month, which would cost him R4 000,00.

REQUIRED:

Problem 1: Calculate the business operating break-even point and EBIT on the departmental store order.

Problem 2: If John renegotiates the contract at a price of R10,00 per figurine, what will the EBIT be?

Problem 3: If the buyer pays R8,00 per unit but is willing to negotiate quantity, what quantity of figurines will result in an EBIT of R4 000,00?

Problem 4: This time, the jollies come in 15 different varieties. Whereas the average variable cost per unit is R6,00, the actual cost varies from unit to unit. What recommendation would you have for John with regard to pricing and/or the numbers and types of units that he offers for sale?