Question

Part I

A firm has the following projections for 2019: sales of 7,000 units at a selling price of $ 36; variable manufacturing costs of $ 75,600; fixed manufacturing costs of $ 26,000; variable selling and administrative costs are 25% of sales; fixed selling and administrative costs are $ 38,800.

1. What is the breakeven point in units and sales dollars?
2. How many units must be sold to earn a target profit of $ 72,900?
3. Presume an operating income $ 170,100. What is the total sales revenue?

Part II

Flying Friends Inc. distributes a high-quality wooden birdhouse that sells for $ 20. Variable costs are $ 8 and fixed costs total $ 180,000 per year.

1. Due to an increase in demand, the firm estimates that sales will increase by $ 75,000 next year. Presume that fixed costs do not change. How much will net income increase (or net loss decrease)?
2. Presume that the firm sold 18,000 birdhouses last year. The sales manager is convinced that a 10% reduction in selling price, combined with a $ 30,000 increase in advertising, would cause annual sales in units to increase by one-third. What impact would these changes have on net income? Be specific! (Hint: prepare income statements.) Would you recommend that the firm do as the sales manager suggests?

Answer 1