Question

ABC Corporation is a manufacturing firm that produces and sales high-end mountain bikes. DEF Corp. sales it manufactured mountain bikes to retail stores. Each bike has a selling price of $2,500 and variable expenses of $1,500. The company also has fixed expenses of $225,000. Last year the company sold 250 Mountain Bikes.

1. Prepare a Contribution Margin Income Statement. Sales, variable expenses, and contribution margin should be expressed on a per unit basis as well as in totals.

2. Find the following:

a. Contribution Margin Ratio:

b. Variable Ratio:

c. The Profit Equation:

d. Breakeven in Units:

e. Breakeven in Sales ($):

f. Margin of Safety (Both in dollars and in %):

3. Please find the change in Net Operating Income based on the following scenarios and decide whether the company should choose the scenario as something to do in the future. Also, find the new breakeven for these scenarios in units and dollars.

a. Fixed advertising expenses are increased by $30,000 to add 50 additional units sold during the year.

b. The company changes the component used on bike to a newer, much lighter set. This will cause variable expenses to be increased by $100 but will add in increase of 75 additional bikes being sold during the year. By doing this their fixed warranty expense should decrease by $10,000 annually.

c. The company believes that if they drop their price by 10%, they will see an increase in sales of 40%. In order to achieve that high of an increase they will need add $15,000 in advertising costs.

4. What would be the sales in units and dollars to achieve a target profit if $100,000 using the original data?

Answer 1

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