Question

Please answer every question in detail

PRACTICE QUESTION

Perlin Promotions Limited manufactures promotional items. One of the company’s most popular products is a multi-coloured pen (called the “Stripey”) that is imprinted with the name and advertising slogan of each of its customer firms.

In September, the company sold 50,000 Stripey pens with the following operating results:

Sales (50,000 pens) $40,000

Variable expenses 22,000

Contribution margin $18,000

Fixed expenses 15,000

Income before tax $ 3,000

The company is subject to a 20 percent tax rate.

Required:

1. a) What is the unit contribution margin?

b) What is the contribution margin ratio?

2. What is the monthly break-even point in units (pens sold) and in sales dollars?

3. How many pens would the company have to sell in a month to earn an after-tax profit of $6,000?

4. Refer to the original data.

a) The sales manager is sure that a 25% reduction in selling price, accompanied by an increase of $2,000 in the monthly advertising budget, would increase the number of pens sold by 40% . What will the income before tax be next month if the sales manager’s plan is successfully adopted?

b) Would you recommend adoption of this plan? Why or why not?

5. Refer to the original data. The company is considering the purchase of new equipment that would reduce direct labour costs by $0.09 (9 cents) per pen. However, the new equipment would increase the depreciation expense relating to pen production by $3,000 per month. If this change is implemented, and the selling price per pen is unchanged, how many pens would have to be sold in a month to earn the same net income as was realized in September?

6. Refer to the original data. Suppose that, on October 1, the company introduced a new pen (called the “Executive”). The Executive pen has a selling price of $2.00 each, unit variable costs of $1.415, and will add $5,000 per month to fixed expenses. During the month of October, 20,000 Executive pens were sold. But, because some customers switched to the “Executive” model, sales of Stripey pens were 25% lower than in September. If this sales mix remains constant in the future, calculate the monthly breakeven sales in dollars of the two pen models combined.

Answer 1