You are the chief financial officer of a jewelry manufacturing and wholesaling company, Precious Stone Jewelry, Inc. (Your company’s motto is “Romantic selections to suit every budget.”) At this morning’s executive meeting, you distributed last month’s income statement—which contained the following information:

Precious stone Jewelry

Income statement

Revenues ......... $ 1,000,000

Variable costs .......... 600,000

Contribution ......... $ 400,000

Fixed costs ........... 260,000

Profit before taxes ...... $ 140,000

Taxes (25% of profit before taxes) . 35,000

Profit after taxes ....... $ 105,000

During the meeting, the various officers of the company made the following reports:

• The marketing director indicated that, due to a competitor leaving the market, Precious Stone could raise the unit selling price on all products by 20% without affecting demand.

• The operations director indicated that, due to recent advances in technology, the company’s unit variable costs could be reduced by 20%.

• The controller distributed a new tax bill, just signed into law, that will increase the company’s tax rate to 30% of profit before taxes.

Required:

a. What is your company’s current breakeven revenue? (For this question, ignore all of the changes announced at the meeting.)

b. Ignoring the other two changes, what effect would raising the unit selling price by 20% have on breakeven revenue?

c. Ignoring the other two changes, what effect would decreasing the unit variable cost by 20% have on the breakeven revenue?

d. Ignoring the other two changes, what effect does a change in the tax rate have on the breakeven point?

e. Suppose all of the changes announced at the meeting do take place. What will your company’s profit after taxes be next month? Support your answer with a pro-forma income statement (“pro-forma” means the income statement for a time period that has not yet occurred).