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Rainbow Paints operates a chain of retail paint stores. Although the paint is sold under the Rainbow label, it is purchased from an independent paint manufacturer. Guy Walker, president of Rainbow Paints, is studying the advisability of opening another store. His estimates of monthly costs for the proposed location are: |
| Fixed costs: | |||
| Occupancy costs | $ | 3,160 | |
| Salaries | 3,640 | ||
| Other | 1,200 | ||
| Variable costs (including cost of paint) | $ | 6 | per gallon |
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Although Rainbow stores sell several different types of paint, monthly sales revenue consistently averages $10 per gallon sold. |
| a. |
Compute the contribution margin ratio and the break even point in dollar sales and in gallons sold for the proposed store. |
| Contribution margin ratio | % |
| Break even sales volume in dollars | $ |
| Break even sales volume in gallons | |
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| c. |
Walker thinks that the proposed store will sell between 2,200 and 2,600 gallons of paint per month. Compute the amount of operating income that would be earned per month at each of these sales volumes. |
| Projected operating income at various levels | |
| 2,200 Gallons | $ |
| 2,600 Gallons | $ |
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