Green Thumb operates a chain of lawn fertilizer stores. Although the fertilizer is sold under the Green Thumb label, it is purchased from an independent manufacturer. Sue Smith, president of Green Thumb, is studying the advisability of opening another store. Her estimates of monthly costs for the proposed location are:

Fixed costs:

Occupancy costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,000

Salaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,400

Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,600

Variable costs (including cost of fertilizer) . . . . . . . . . . . . $ 12 per bag

Although Green Thumb stores sell several different types of fertilizer, monthly sales revenue consistently averages $20 per bag sold.

Instructions

a. Compute the contribution margin ratio and the break-even point in dollar sales and in bags sold for the proposed store.

b. Draw a monthly cost-volume-profit graph for the proposed store, assuming 2,000 bags per month as the maximum sales potential.

c. Smith thinks that the proposed store will sell between 1,500 and 1,800 bags of fertilizer per month. Compute the amount of operating income that would be earned per month at each of these sales volumes.