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 2017.

Sales (12,500 units x $84)	$1,050,000
Variable costs (12,500 units x $63)	787,500
Contribution margin	262,500
Fixed costs	296,000
Operating profit (loss)	(33,500)

1) Compute RME’s breakeven point in both units and dollars and compute the contribution margin ratio.

Break Even Point (in Units) = Fixed Cost/Contribution Margin Per Unit = 296,000/(84 - 63) = 14,095 units

Break Even Point (Dollars) = Break Even Point (Units)*Selling Price Per Unit = 14,095*84 = $1,184,000

Contribution Margin Ratio = (Selling Price - Variable Costs)/Selling Price*100 = (84 - 63)/84*100 = 25%

2) What would be the required sales, in units and in dollars, to generate a pretax profit of $40,000?

?

Sales (Units) = (Fixed Cost + Desired Profit)/Contribution Margin Per Unit = (296,000 + 40,000)/(84 - 63) = 16,000 units

Sales (Dollars) = (Fixed Cost + Desired Profit)/Contribution Margin Ratio = (296,000 + 40,000)/25% =$1,344,000

3) Assume a combined income tax rate of 40%. What would be the required sales volume, in both units and in dollars, to generate an after-tax profit of $30,000?

Pre-Tax Profit = After Tax Profit/(1-Tax Rate) = 30,000/(1-40%) = $50,000

Now, we can calculate the required sales in units and dollars as below:

Sales (in Units) = (Fixed Cost + Desired Pre-Tax Profit)/Contribution Margin Per Unit = (296,000 + 50,000)/(84 - 63) = 16,476 units

Sales (Dollars) = (Fixed Cost + Desired Profit)/Contribution Margin Ratio = (296,000 + 50,000)/25% =$1,384,000

4) Prepare a contribution income statement as a check for your calculations in requirement 3 above.

4)

Contribution Income Statement
Sales (16,476*84)	1,384,000
Less Variable Costs (16,476*63)	1,038,000
Contribution Margin	346,000
Less Fixed Costs	296,000
Pre-Tax Profit	50,000
Less Taxes	20,000
After-Tax Profit	$30,000

5) The manager believes that a $60,000 increase in advertising would result in a $200,000 increase in annual sales. If the manager is right, what will be the effect on the company’s operating profit or loss?

6) 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 25%. What effect would this strategy have on operating profit (loss)?

7) Refer to the original data. During 2017, RME saved $5 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 $50,000 in fixed cost per year. Was this a wise change? Why or why not?

PLEASE ANSWER 5-7

Answer 1

1) Compute RME’s breakeven point in both units and dollars and compute the contribution margin ratio.

Calculation of Breakeven point

Contribution= Sales privce- Variable cost=$84-$63=$21 per unit

P/E (Profit earning )Ratio = Contribution/Sales*100 =21/84*100 =25%

BEP (Breakeven point) UNIT= Fixed cost/(Sales price per unit-Variable cost per unit)=$296000/(84-63)=14095 Units

BEP (Breakeven point) Amount=Fixed cost/PE Ratio=$296000/25%=$1184000.00

5) The manager believes that a $60,000 increase in advertising would result in a $200,000 increase in annual sales. If the manager is right, what will be the effect on the company’s operating profit or loss?

BEP = Fixed cost /PE ratio= $296000+$60000=356000/25%=$1424000

Last BEP=$1184000 After advertisement BEP=$1424000 = $1424000-$1184000=$240000

Yes Sales increase in annual and also company profit margin increase.

sales = fixed cost + varible cost+profit

variable cost =12500 unit + 200000/84=2380 unit= 14880 units*63=$937440

$1050000+$200000=$296000+$60000+$937440+profit

$1250000=1293440+profit

profit=1250000-1293440

Loss=$43440

6) 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 25%. What effect would this strategy have on operating profit (loss)?

10% reduction in price = 84-84*10%=75.60

Fixed cost =$296000+$40000=$336000

Sales Units=12500+12500*25%=15625 sales unit

Sales= Variable cost+Fixed cost+Profit

15625*75.60=+15625*63+336000+profit

1181250=1320375+profit

Loss=$139125

7) Refer to the original data. During 2017, RME saved $5 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 $50,000 in fixed cost per year. Was this a wise change? Why or why not?

Sales= Variable cost+Fixed cost+Profit

12500*84=12500*58+346000+profit

1050000=725000+346000+profit

Loss=$21000