Question

	Baby Dolls	Teddy Bears	Toy Cars
Volume	200,000	125,000	225,000
Sales Prices	$3.50	$2.75	$3.15
Variable Costs	$2.05	$1.75	$2.45
Fixed Costs	$65,000	$125,000	$35,000

Target pretax income= $0

Investment= $2 million

Capacity=1 million units

1. Assume that the volume of dolls sold increases to 225,000 units, with no change in fixed or variable costs. What is the new pretax income? Does the number produced by your financial model appear to be reasonable? (Manually estimate the increase in pretax income if volume increases and fixed costs remain constant.)

2. Based on the original assumptions, what is the effect on pretax income if variable costs increase by 5% for each of the three product lines?Assume that nothing else changes.

3. Return to the original assumptions. Assume that a sales manager proposed a new advertising campaign to boost sales volume. The campaign would cost $30,000 and is estimated to increase the volume of each product as follows:

Baby doll sales increase by 20,000 units.

Teddy bear sales increase by 7,500 units.

Toy car sales increase by 30,000 units.

What would be the effect on pretax income if this plan were adopted?

4.Return to the original assumptions. Now assume that, due to competition, Toddler Toys must cut prices on each of its three products by 20%. In addition, a new advertising campaign costing $45,000 must be instituted to counteract bad publicity. Given these assumptions, what is the new breakeven point?

5.Return to the original assumptions. What would be the pretax income if Toddler Toys increased the price of all three products by 10% and the volume of each product line decreased by 5%?

6.Given the same assumptions as in Part 5, how many units must Toddler Toys sell to earn a target pretax income of $100,000? a target pretax income of $150,000? a pretax return on investment (ROI) of 10%?(Hint: To determine the target pretax income, multiply 10% by the amount invested.)

Answer 1

Income Statement at present
		Baby Dolls	Teddy Bears	Toy Cars	Total
Volume	A	200,000	125,000	225,000
Sales Price	B	3.5	2.75	3.15
Variable Cost	C	2.05	1.75	2.45
Sales	A*B	700,000	343,750	708,750	1,752,500
Less: Variable Cost	A*C	(410,000)	(218,750)	(551,250)	(1,180,000)
Less: Fixed Cost		(65,000)	(125,000)	(35,000)	(225,000)
Revenue/Pretax Income		225,000	-	122,500	347,500
1) Income Statement
		Baby Dolls	Teddy Bears	Toy Cars	Total
Volume	A	225,000	125,000	225,000	575,000
Sales Price	B	3.5	2.75	3.15
Variable Cost	C	2.05	1.75	2.45
Sales	A*B	787,500	343,750	708,750	1,840,000
Less: Variable Cost	A*C	(461,250)	(218,750)	(551,250)	(1,231,250)
Less: Fixed Cost		(65,000)	(125,000)	(35,000)	(225,000)
Revenue/Pretax Income		261,250	-	122,500	383,750
AS the volume increases with no change in Fixed cost , the pretax income will increase as shown above
2)
		Baby Dolls	Teddy Bears	Toy Cars	Total
Volume	A	200,000	125,000	225,000	550,000
Sales Price	B	3.5	2.75	3.15
Variable Cost(Increase by 5%)	C	2.15	1.84	2.57
Sales	A*B	700,000	343,750	708,750	1,752,500
Less: Variable Cost	A*C	(430,500)	(229,688)	(578,813)	(1,239,000)
Less: Fixed Cost		(65,000)	(125,000)	(35,000)	(225,000)
Revenue/Pretax Income		204,500	(10,938)	94,938	288,500
The Pretax income will decline if Variable cost increases with no change in sales and fixed cost.
3)
		Baby Dolls	Teddy Bears	Toy Cars	Total
Volume	A	220,000	132,500	255,000	607,500
Sales Price	B	3.5	2.75	3.15
Variable Cost	C	2.05	1.75	2.45
Sales	A*B	770,000	364,375	803,250	1,937,625
Less: Variable Cost	A*C	(451,000)	(231,875)	(624,750)	(1,307,625)
Less: Fixed Cost		(65,000)	(125,000)	(35,000)	(225,000)
Less: Advertising cost					(30,000)
Revenue/Pretax Income		254,000	7,500	143,500	375,000
The Advertising campaing will increase the pretax income as this results in incresae in the sales
volume. The increase in sales volume is enough to cover the fixed advertosing cost and leaving
additional margin.
4)
		Baby Dolls	Teddy Bears	Toy Cars	Total
Volume	A	200,000	125,000	225,000	550,000
Sales Price(decrease by 20%)	B	2.8	2.2	2.52
Variable Cost	C	2.05	1.75	2.45
Sales	A*B	560,000	275,000	567,000	1,402,000
Less: Variable Cost	A*C	(410,000)	(218,750)	(551,250)	(1,180,000)
Less: Fixed Cost		(65,000)	(125,000)	(35,000)	(225,000)
Less: Advertising cost					(45,000)
Revenue/Pretax Income		85,000	(68,750)	(19,250)	(48,000)
Breakeven point = Contribution Margin +Fixed Cost			= (Sales - Variable Cost)+Fixed Cost
			=(1402000 - 1180000) + 225000+ 45000
Breakeven point in sales =			492,000
5)
		Baby Dolls	Teddy Bears	Toy Cars	Total
Volume(decrease by 5%)	A	190,000	118,750	213,750	522,500
Sales Price(increase by 10%)	B	1.225	0.75625	0.99225
Variable Cost	C	2.05	1.75	2.45
Sales	A*B	232,750	89,804.69	212,093	534,648
Less: Variable Cost	A*C	(389,500)	(207,813)	(523,688)	(1,121,000)
Less: Fixed Cost		(65,000)	(125,000)	(35,000)	(225,000)
Revenue/Pretax Income		(221,750)	(243,008)	(346,594)	(811,352)