Problem 3-24B Assessing 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

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.

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 Requirement a, should Milton proceed with plans to improve product quality? Support your answer by preparing a budgeted income statement.

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.

Prepare a break-even graph using the cost and price assumptions outlined in Requirement c.