Problem 3-24AAssessing simultaneous changes in CVP relationships using the equation method

CHECK FIGURES

Vaughn Corporation sells hammocks; variable costs are $75 each, and the hammocks are sold for $125 each. Vaughn incurs $240,000 of fixed operating expenses annually.

Required

1. Determine the sales volume in units and dollars required to attain a $60,000 profit. Verify your answer by preparing an income statement using the contribution margin format.
2. Vaughn is considering implementing a quality improvement program. The program will require a $10 increase in the variable cost per unit. To inform its customers of the quality improvements, the company plans to spend an additional $10,000 for advertising. Assuming that the improvement program will increase sales to a level that is 4,000 units above the amount computed in Requirementa,should Vaughn proceed with plans to improve product quality? Support your answer by preparing a budgeted income statement.
3. Determine the new break-even point in units and sales dollars as well as the margin of safety percentage, assuming that the quality improvement program is implemented.
4. Draw a break-even graph using the cost and price assumptions outlined in Requirementc.

Problem 3-24BAssessing simultaneous changes in CVP relationships using the equation method

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

Required

1. 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.
2. Milton 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 Requirementa, should Milton proceed with plans to improve product quality? Support your answer by preparing a budgeted income statement.
3. Determine the new break-even point and the margin of safety percentage, assuming Milton adopts the quality improvement program. Round your figures to two decimal points.