Vishvesh Soni

JW Sport Supplies

Introduction

A gym bag company, started by James Jones and William west as they were working out

together and working in the same career prospects. They have found many loopholes in the

bag but it started with the problem of fitting sneakers in the bag. They have begun small side

business but after it grows they have shifted from their jobs to the company to make it more

efficient

After five years of growth of JW sports supplies, they have achieved the sales target of $ 1.5

million with a healthy profit. They have put 300,000 to reach the next level. They have

started to analyze the costs and benefits. They have found some interesting facts and a

leading problem.

Problem statement

Which decisions should be made to reach the break-even point and elevate profits

Solution

Calculation of total cost per unit

cost per unit = total of all the costs divided by the number of units produced

PARTICULARS 1200 UNITS 1900 UNITS

Direct material 36000 57000

direct labor 18000 28500

rent 5000 5000

depreciation 4000 4000

electricity 4400 5800

selling 8000 8000

sales commission 12000 19000

administrative 5000 5000

TOTAL COST 112000 154000

93.33 81.05
TOTAL COST PER [112000 / 1200 [154000 / 1900
UNIT UNITS ] UNITS ]
Exhibit-1

Break-even point is the point where there is no profit no loss, any point above break-even
point is profit

Therefore any amount earned over and above the cost per unit is profit.

Statement showing the classification of cost for units produced and sold 1200 units

VARIABLE FIXED MIXED

Direct materials 36000

direct labor 18000

rent 5000

depreciation 4000

electricity 4400

other manufacturing
costs 19600

selling 8000

sales commission 12000

administrative 5000

Exhibit-2

Statement showing the classification of cost for units produced and sold 1900 units
 VARIABLE FIXED MIXED
PARTICULARS COST COST COST

Direct materials 57000

direct labor 28500

rent 5000

depreciation 4000

electricity 5800

other manufacturing
costs 21700

selling 8000

sales commission 19000

administrative 5000

Calculation of fixed and variable portion of a mixed cost

Formula :

VARIABLE PORTION = change in cost / change in level of activity

1. ELECTRICITY:

(5800 - 4400) / (1900 - 1200)

= 1400 / 700

= $ 2
Fixed portion = mixed cost - variable portion

= 4400 - (1200 units * 2)

= $ 2000
2. OTHER MANUFACTURING EXPENSES

VARIABLE PORTION = change in cost / change in level of activity

= (21700 - 19600) / (1900 -1200)

= $ 3
Fixed portion = mixed cost - variable portion

= 19600 - (1200 units * 3)

= $ 16000
Statement showing variable cost per unit

particulars amount per unit

direct materials

[ 36000 / 1200 or 57000/ 1900 ]

direct labor

[ 18000 / 1200 or 28500 / 1900 ]

sales commission

[ 12000 / 1200 or 19000 / 1900 ]

variable electricity cost 2

variable other manufacturing expenses 3

TOTAL VARIABLE COST PER UNIT 60

Statement showing the total fixed cost

AMOUNT
PARTICULARS ($)

rent 5000

depreciation 4000

fixed selling cost 8000

fixed administrative cost 5000

fixed electricity cost 2000

fixed other manufacturing overheads 16000

Alternatives

1. Reduce the Raw material costs & other manufacturing costs

Exhibit-1 shows that fixed raw material cost and manufacturing costs are very high as

per the other expenses which is why if JW sports supplies can change their raw

material and manufacturing overhead costs saving can help them to reduce the costs

which will result in low break-even point and high margin. This is an optimal

alternative because control over the supply is more than other factors and its relatively

easy execute this.

2. Reduce the Labor cost

Reducing labor costs can help them to reach their goal and have the same effects as

alternative-1 but the cons of it are, laborers can oppose the decision and put supply in

hold which can harm the operations and profits which is why its sub optimal

alternative

3. Increase the prices

An increase in the price can negatively affect on the sales as they are not investing in

advertising or brand contruction operations and that’s why sales will go down if they

increase the prices which is why this alternative is suboptimal.

Recommendation

Eliminating manufacturing overheads as they are even higher than labor costs (exhibit-2), and

lower the raw material price by more efficient sourcing can help JW Sports Supplies to reach

even much faster and margins will be increased also which results in more growth.