Question

Riggs and Murtaugh Engine Inc. (RME) is suffering from the effects of increased local and global competition for its main product, a lawn mower that is sold in discount stores throughout the United States. The following table shows the results of RME’s operations for 2018.

Sales (13,200 units x $82)	$1,082,400
Variable costs (13,200 units x $64)	844,800
Contribution margin	237,600
Fixed costs	290,000
Operating profit (loss)	(52,400)

1. Compute RME’s breakeven point in both units and dollars and compute the contribution margin ratio.
2. What would be the required sales, in units and in dollars, to generate a pretax profit of $44,000?
3. Assume a combined income tax rate of 25%. What would be the required sales volume, in both units and in dollars, to generate an after-tax profit of $44,000?
4. Refer to the original data.  The manager believes that a $40,000 increase in advertising would result in a $175,000 increase in annual sales. If the manager is right, what will be the effect on the company’s operating profit or loss?
5. Refer to the original data. The vice president in charge of sales feels that a 10% reduction in price in combination with a $40,000 increase in advertising will cause unit sales to increases by 20%. What effect would this strategy have on operating profit (loss)?
6. Refer to the original data. During 2018, RME saved $6 of unit variable costs per lawn mower by buying from a different manufacturer. However, the cost of changing the plant machinery to accommodate the new part cost an additional $60,000 in fixed cost per year. Was this a wise change? Why or why not?

Answer 1

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Riggs	Amount $
Sell price	82.00
Less: reduction by 10%	8.20
Revised Sell price	73.80
Units sold	13,200.00
Add: Increase by 20%	2,640.00
Revised Units sold	15,840.00
Income Statement	Amount $
Revised Sell price	73.80
Less: Variable costs	64.00
Contribution margin per unit	9.80
Revised Units sold	15,840.00
Contribution margin per unit	155,232.00
Less: Fixed costs	290,000.00
Less: Advertisement costs	40,000.00
Operating Profit (loss)	(174,768.00)
Current Operating Profit (loss)	(52,400.00)
Increase in Operating (loss)	(122,368.00)
Income Statement	Amount $
Sell price	82.00
Less: Variable costs	58.00
Contribution margin per unit	24.00
Revised Units sold	13,200.00
Contribution margin per unit	316,800.00
Less: Fixed costs	290,000.00
Less: Additional fixed costs	60,000.00
Operating Profit (loss)	(33,200.00)
Current Operating Profit (loss)	(52,400.00)
Decrease in Operating (loss)	19,200.00
Yes this was a wise change.