Lizbeth’s Linens sells kitchen potholders and towels. The company generally sells two potholders for every three towels. Each potholder sells for $1.00and has a $0.50 contribution margin. Each towel sells for $2.50 has a $1.50 contribution margin. Fixed costs for the company are $8,800 per month. The company has a tax rate of 25 percent.
Required:
(a) How much revenue is needed to break even each month? How many potholders and towels would this represent?
(b) How much revenue is needed to earn an annual after-tax profit of $40,500? How many ‘‘baskets’’ of potholders and towels is this?
(c) If the company sells the number of ‘‘baskets’’ determined in part (b), but did so by selling four towels for every two potholders, what would be the company’s pretax profit (or loss)? Why is this amount not the desired $40,500?
(d) If the company sells the number of ‘‘baskets’’ determined in part (b), but did so by selling three potholders for every two towels, what would be the company’s pretax profit (or loss)? Why is this amount not the desired $40,500?