Question

The following monthly data are available for the Challenger Company and its one product, SW, which it manufactures:

                                                                        Total               Per Unit

            Sales                                                   $110,000         $275

            Variable Product Costs                   $ 32,000         $ 80

            Variable SGA Costs                         $ 12,000         $ 30

            Fixed Overhead                                $ 12,800

            Fixed SGA                                         $ 40,000        

Additionally, beginning inventory was 20 units of SW and production during the month was 50 units greater than units sold.

Required:

1. Under the above scenario, what are?

1. Total contribution margin.
2. Unit contribution margin.
3. Contribution margin ratio.
4. Total earnings before interest and taxes (EBIT).

2. What is the break-even point in?

1. Units

2. Sales dollars

3. Management is contemplating the use of plastic gearing rather than the metal gearing in SW. This change would reduce variable costs by $15 per unit. The company’s marketing manager predicts that this would reduce the overall quality of the product and thus would result in a new sales level of 350 units per month, but sales price would stay the same for now. What is the new NOI/EBIT under this scenario? Why or why not should this change be made?

Answer 1