Question

4. CVP analysis; break even: K-9’s Companions, Inc. operates a chain of pet supply stores that carry many styles of dog beds that are all sold at the same price.

The following data pertains to K-9’s Companions and is typical of the company’s many outlets:

		Per dog bed
Selling price		$	35.50
Variable expenses:
Product costs (DM, DL, MOH)		$	11.75
Selling and admin costs			3.15
Total variable expenses		$	14.90
			Annual
Fixed expenses:
Advertising		$	17,350
Depreciation			18,000
Administrative Salaries			92,400
Total fixed expenses		$	127,750

1. What is K-9’s Companions annual break-even point in both unit sales and dollar sales?   Round your unit sales answer up to the nearest whole unit. Round your dollar sales answer to the nearest cent (i.e. two decimal places).
2. If 6,000 dog beds are sold in a year, what would be K-9’s Companion’s net operating income (loss)?
3. If 7,000 dog beds are sold in a year, what would be K-9’s Companion’s net operating income (loss)?
4. Suppose the current sales volume is 7,000 dog beds per year. The company is considering using higher quality materials in the manufacturing process of its dog beds. This switch in materials quality will increase DM costs by $0.25 per unit. The firm plans to advertise this change in materials to customers, which will increase advertising costs by $3,000, but the firm also expects that this advertising campaign will increase sales volume by 200 dog beds.
   1. What would be the effect of these changes on the number of units needed to break even?
   2. What would be the effect of these changes on current net income?
   3. Based on your answers, should the firm make this change? Why or why not? Briefly explain your answer.

Answer 1