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?

Answer rating: 100% (QA)

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