Due to the sluggish economy, the Bi-Wheels Company has experienced some difficulty in selling its bicycles....
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Due to the sluggish economy, the Bi-Wheels Company has experienced some difficulty in selling its bicycles. The following data relate to the current year: Sales (9,000 units @ $100/unit) Less variable costs (9,000 @ $60/unit) Contribution margin Less fixed costs Net operating loss $900,000 540,000 $360,000 400,000 ($40,000) #1 Breakeven in Units # 1 Breakeven in $ #1 Contribution Margin % Sales Less variable costs Contribution margin Less fixed costs Net operating loss Original operating loss Change Units Sold Price Per Unit 10,000 $1,000,000 40.00% Scenario #2 $ $0 $0 ($40,000) $40,000 9,000 100.00 Scenario #3 $0 $0 ($40,000) $40,000 Scenario #4 $0 Required: 1. Compute Bi-Wheels' annual breakeven point, in both units and dollars. Also, compute the contribution margin ratio. 2. The manager believes that a $40,000 increase in advertising would result in a $120,000 increase i annual sales. If the manager is right, what will be the net effect on the company's operating income? SO ($40,000) $40,000 3. Refer to the original data. The vice-president in charge of sales is certain that a 10% reduction in selling price in combination with a $30,000 increase in advertising will cause sales volume to increases by 50%. What effect would this strategy have on operating income of the company? 4. Refer to the original data. In the following year, Bi-Wheels saved $5 of total variable costs per bicycle by buying parts from a different manufacturer. However, Bi-Wheels' rent and insurance increased by $5,600. The store sold 11,000 bikes. What was its operating income for the year? 5. Reviewing 2, 3, and 4 above, what strategy would you recommend to the executive management team? Due to the sluggish economy, the Bi-Wheels Company has experienced some difficulty in selling its bicycles. The following data relate to the current year: Sales (9,000 units @ $100/unit) Less variable costs (9,000 @ $60/unit) Contribution margin Less fixed costs Net operating loss $900,000 540,000 $360,000 400,000 ($40,000) #1 Breakeven in Units # 1 Breakeven in $ #1 Contribution Margin % Sales Less variable costs Contribution margin Less fixed costs Net operating loss Original operating loss Change Units Sold Price Per Unit 10,000 $1,000,000 40.00% Scenario #2 $ $0 $0 ($40,000) $40,000 9,000 100.00 Scenario #3 $0 $0 ($40,000) $40,000 Scenario #4 $0 Required: 1. Compute Bi-Wheels' annual breakeven point, in both units and dollars. Also, compute the contribution margin ratio. 2. The manager believes that a $40,000 increase in advertising would result in a $120,000 increase i annual sales. If the manager is right, what will be the net effect on the company's operating income? SO ($40,000) $40,000 3. Refer to the original data. The vice-president in charge of sales is certain that a 10% reduction in selling price in combination with a $30,000 increase in advertising will cause sales volume to increases by 50%. What effect would this strategy have on operating income of the company? 4. Refer to the original data. In the following year, Bi-Wheels saved $5 of total variable costs per bicycle by buying parts from a different manufacturer. However, Bi-Wheels' rent and insurance increased by $5,600. The store sold 11,000 bikes. What was its operating income for the year? 5. Reviewing 2, 3, and 4 above, what strategy would you recommend to the executive management team?
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1 Annual Breakeven Point Breakeven in Units Fixed Costs Contribution Margin per unit Breakeven in Units 40000 100 60 1000 units Breakeven in Dollars B... View the full answer
Related Book For
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1337614689
9th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
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