PROBLEM:

When Siremong purchased the Clean Clothes Corner Laundry, he thought that because it was in a good
location near several high-volume neighborhoods, he would automatically generate good business if he improved
the laundry’s physical appearance. Thus, he initially invested a lot of his cash reserves in remodeling the exterior
of the laundry. However, he just about broke even in the year following his acquisition of the laundry, which he
didn’t feel was a sufficient return, given how hard he worked. Siremong didn’t realize that the dry-cleaning
business is very competitive and that success is based more on price and quality service, including quickness of
service than on laundry’s appearance.
In order to improve his service, he is considering purchasing a new dry-cleaning equipment, including a
pressing machine that could substantially increase the speed at which he can dry-clean clothes and improve their
appearance. The new machinery costs P729,000 installed and can clean 40 clothes items per hour (320 items per
day). Siremong estimates his variable cost to be P11.25 per item dry-cleaned, which will not change if he
purchased the new equipment. His current fixed costs are P76,000 per month. He charges customers P49.50 per
clothing item.

DEFINITION OF THE PROBLEM:

The main problem of Siremong is how to improve his services to earn profit because he is just currently
selling at break-even point. He needs to make a decision whether to purchase a new dry-cleaning equipment to
improve the quality and speed of his services that will increase his sales or try other options to earn profit .

1. What is Siremong’s current monthly volume?

Since Siremong is just currently having break-even operations, we will be able to get his current monthly
volume by computing the break-even point.

Given data: Selling Price ( p) = P49.50

Variable Cost (c v )= P11.25 per item
Fixed Cost (c f ) = P76,000
cf
Formula: Break-even point (sales in units) =
p−c v
76,000
=
49.50−11.25

76,000
= 38.25

= 1986.93
Hence, his current monthly volume is 1,987 items.

250000
2. If Siremong
purchases the
200000
Break-even point new
Sales/Cost in equipment,
150000
Peso how many
Fixed Cost
additional
Total Cost
100000 items will he
Total Revenue
have to dry-
clean each
50000 month to
break-even?
0
600 1200 1800 2400 3000 3600 4200 4800 Let us assume
Volume / Units that
Salesthe life of / Items
in Volume
 the new equipment is 3 years or 36 months. Hence, monthly depreciation will be P20,250
(P729,000/36months). This amount will be added to his fixed cost.

Given data: Selling Price ( p) = P49.50

Variable Cost (c v ) = P11.25 per item
Fixed Cost (c f ) = P76,000 + P20,250 = P96,250
cf
Formula: Break-even point (sales in units) =
p−c v
96,250
=
49.50−11.25

96,250
=
38.25

= 2,516.34

Additional items required to dry clean = 2,516.34 – 1986.93 = 529 items

each month to break-even

250000

200000
New Break-even point

150000 Old Fixed Cost

New Fixed Cost Break-even point
Sales/Cost in
Old Total Cost
100000 Peso
New Total Cost
Total Revenue
50000

0
600 1200 1800 2400 3000 3600 4200 4800

Volume / Units

3. Siremong estimates that with the new equipment, he can increase his volume to 4,300 items per month.
What monthly profit would he realize with that level of business during the next 3 years? After 3 years?

Sales Revenue (4300 x P49.50) P 212,850.00

Variable cost (4300 x P11.25) 48,375.00
Contribution Margin 164,475.00
Fixed Cost 96,250.00
Profit 68,225.00

During the next 3 years, he will earn profit amounting to P68,225 monthly if he buys the new equipment
and dry-clean 4,300 items.
 250000

200000

150000
New Fixed Cost
Total Revenue @ 4,300 items
New Total Cost
100000 Total Revenue
New Break-even point
Profi
t
50000 Sales/Cost in
Peso

0
600 1200 1800 2400 3000 3600 4200 4800

Volume / Units

After three years, the cost of the new equipment will be recovered:
P20,250 * 36months = P729,000
Hence, fixed cost will decrease to 76,000.

Sales Revenue (4300 x P49.50) P 212,850.00

Variable cost (4300 x P11.25) 48,375.00
Contribution Margin 164,475.00
Fixed Cost 76,000.00
Profit P 88,475.00

Thus, after 6 years, monthly profit will increase to P88,475 at 4,300 items targeted to dry clean with
the same price.

250000

Total Revenue @ 4,300 items

200000

Fixed Cost Profi

150000
Sales/Cost in t
New Break-even point
Total Cost Peso
100000
Total Revenue
50000

0
600 1200 1800 2400 3000 3600 4200 4800

Volume / Items
 In the above graph, we can see that the break-even point has been reduced to 1,987 items than the
previous graph because fixed cost decreases.

4. Siremong believes that if he doesn’t buy the new equipment but lowers his price to P44.55 per item, he
will increase his business volume. If he lowers his price, what will his new break-even volume be?

Given data: New Selling Price ( p) = P44.55

Variable Cost (c v ) = P11.25 per item
Fixed Cost (c f ) = P76,000
cf
Formula: Break-even point (sales in units) =
p−c v
76,000
=
44.55−11.25

76,000
=
33.30

= 2,282.28

Thus, at P44.55 selling price, he needs to dry-clean at least 2,282 items to break-even which is greater
than his actual volume.

If his price reduction results in a monthly volume of 3,800 items, what will his monthly profit be?

Sales Revenue (3800 x P44.55) P 169,290.00

Variable cost (3800 x P11.25) 42,750.00
Contribution Margin 126,540.00
Fixed Cost 76,000.00
Profit P 50,540.00

If he doesn’t buy the new equipment and tends to reduce his selling price at 44.55, he will increase his
sales volume at 3,800 items which he will earn a monthly profit of P50,540.

250000

200000

Total Revenue @ P44.55/item

150000 New Break-even point
Fixed Cost 76000 Sales/Cost in Profi
Total Cost Peso t
100000 New Total Revenue

50000

0
600 1200 1800 2400 3000 3600 4200 4800

Volume / Units
 5. Siremong estimates that if he purchases the new equipment and lowers his price to P44.55 per item, his
volume will increase to about 4,700 units per month. Based on the local market, that is the largest
volume he can realistically expect.

Sales Revenue (4700 x P44.55) P 209,385.00

Variable cost (4700 x P11.25) 52,875.00
Contribution Margin 156,510.00
Fixed Cost 96,250.00
Profit P 60,260.00

If he buys the new equipment and tends to reduce his selling price at 44.55, he will increase his sales
volume at 4,700 items which he will earn a monthly profit of P60,260.
250000

200000

Total Revenue @ P44.55/item

150000
New Fixed Cost Break-even point Profi
Sales/Cost in
t
100000 New Total Cost Peso
New Total Revenue
50000

0
600 1200 1800 2400 3000 3600 4200 4800

Volume / Units

CONCLUSION/RECOMMENDATION:
In the above presentations and computations, analysis of different situations was summarized as follows:

 If Siremong tends to buy the new equipment and use the same selling price per item, he can
increase his sales volume to 4,300 items which he will earn a monthly profit amounting to
P68,225 for 3 years and will be P88,475 after the next 3 years. He needs to dry-clean at least
2,516 items each month to break-even.
 If Siremong tends to lower his price and will not buy the new equipment, he can increase his
sales volume to 3,800 items which he will earn a monthly profit amounting to P50,540. He needs
to dry-clean at least 2,282 items to break-even.
 If Siremong tends to lower his price and will buy the new equipment, he can increase his sales
volume to 4,700 items which he will earn a monthly profit amounting to P60,260. He needs to
dry-clean at least 2,890 items to break-even.

Therefore, it is more appropriate to recommend that he should buy the new equipment and retain his
actual selling price to earn a higher profit. Because, if he still tends to lower his price, it will lower his
monthly profit and at the same time will increase his break-even point which is unfavorable.