Friedman Company sells tennis racquets; variable costs for each are $45, and each is sold for $135. Friedman incurs $540,000 of fixed operating expenses annually.

a. Determine the sales volume in units and dollars required to attain a $270,000 profit.
Verify your answer by preparing an income statement using the contribution margin format.
b. Friedman is considering establishing a quality improvement program that will require a $15 increase in the variable cost per unit. To inform its customers of the quality improvements, the company plans to spend an additional $150,000 for advertising. Assuming that the improvement program will increase sales to a level that is 5,000 units above the amount computed in Requirement a, should Friedman proceed with plans to improve product quality? Support your answer by preparing a budgeted income statement.
c. Determine the new break-even point and the margin of safety percentage, assuming Friedman adopts the quality improvement program. Round your figures to 2 decimal points.
d. Prepare a break-even graph using the cost and price assumptions outlined in Requirement c.

  • CreatedFebruary 07, 2014
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