Question

Managerial accounting 3rd edition

Authors Charles Davis /ELIZEBETH Davis

3.29. Breakeven Analysis; target income. Briggs Herra, a president of Retro Recreation products, Inc. is concerned about declines that he is beginning to see in the demand for the company's line of old school logo basket balls as new competitors enter the market. at a current controbution margin of 8, the company must sell 81,250 basketballs to generate the desired $200,000 in anual operating income. Based on recent market research report,Briggs thinks the company can expect annual sell of only 65000 basketball in the future. a. What is Briggs's current level of fixed expenses. b. what is Briggs current Breakeven point? c. if Briggs wants to maintain the current level of operating income in the future while selling 65000 basketballs, what contribution margin must the basket ball generate? d. What action (s) could Briggs thinks the company can expect and annual sales of only 65000 basketballs in the future.

Also help me with question 3.30

Answer 1

a. Current contribution margin = 8. Contribution margin = revenues - variable cost.

Operating income = revenues - variable costs - fixed costs. Thus revenue - variable costs - fixed costs = $200,000 (for 81,250 basketballs).

Thus (8*81,250) - fixed costs = 200,000.

or 650,000-fixed costs = 200,000

or fixed costs = 450,000

b. Breakeven = fixed costs/contribution margin = 450,000/8 = 56,250 basketballs

c. Current level of operating income = 200,000. Let contribution margin be "x". Thus 65,000*x - fixed costs = 200,000

or, 65000x - 450,000 = 200,000

or x = 650,000/65,000 = 10

d. If annual sales is only 65,000 basketballs then contributon margin will have to increase by $2 from $8 to $10. This means a (10-8)/8 = 25% increase in contribution margin. This can be achieved by increasing revenues and controlling the variable costs of the company.