Question

Heli Manufacturing produces headphones and has been suffering from heightened competition. The following tables highlights the results of Heli’s operations for 2019:

Sales (12500 units @ $84)	$ 1 050 000
Variable (12 500 @ $63)	787 500
Contribution Margin	$   262 500
Fixed Costs	296 100
Operating Profit (loss)	($ 33 600)

1. Compute Heli’s breakeven point in both units and dollars.
2. Compute the contribution margin ratio.
3. What will be the required sales, in both units and dollars, to generate a pre-tax profit of $30 000.
4. Prepare a contribution margin income statement for sales of 16,481 units.

Refer to the original data. The Vice President, Marketing feels that a 10% reduction in price, in combination with a $40 000 increase in advertising will cause sales to increase by 25%. What effect would this strategy have on operating profit (loss)?

Answer 1

			Per unit
	Sales	$1,050,000	$84
	Variable Costs	$787,500	$63
	Contribution margin	$262,500	$21
	Fixed Costs	$296,100
	Operating Profit (loss)	-$33,600
a.	Break even sales	14,100	units
	(Fixed Costs/Contribution margin)
	Break even sales in dollars	$1,184,400
	(Fixed Costs/Contribution margin ratio)
b.	Contribution margin ratio	25.00%
	(contribution margin/Sales)
c.
	Traget Sales in dollars	1,304,400
	(Fixed Costs + Profit)/Contribution margin ratio
	(296,100 + 30,000)/25%
	Traget Sales in dollars	15,529
	(Fixed Costs + Profit)/Contribution margin
	(296,100 + 30,000)/21
d.
	Sales (16,481 x $84)	$1,384,404
	Variable Costs (16,481 x $63)	$1,038,303
	Contribution margin	$346,101
	Fixed Costs	$296,100
	Operating Profit (loss)	$50,001
e.
	Sales (15,625 x $75.6)	$1,181,250
	Variable Costs (15,625 x $63)	$984,375
	Contribution margin	$196,875
	Fixed Costs	$336,100
	Operating Profit (loss)	-$139,225