Rainbow Tool & Machine (RTM) in Rainbow City, Alabama has been machining precision parts, die building, and servicing customers for over 30 years. It is facing a difficult time with one of its product lines ‘Wire’ due to severe price competition with a lot of competitors. Mr. Alex Brown, Chief Financial Officer of RTM, has prepared the following contribution format income statement for the month ended on June 30, 2022. Particulars Per Unit ($) Total Amount ($) Sales (20,000 units) 50 1,000,000 Variable expenses 35 700,000 Contribution Margin 15 300,000 Fixed Expenses 350,025 Net Operating Loss - 50,025 Mr. Allen Walker, President of RTM, raised his concern on the performance of ‘Wire’ product line and call for a group meeting. 

The meeting has made a threadbare discussion on the product lines and scrutinizes a few alternative courses of action. You are requested to consider the below situations for analysis. 

Required: 

a) Mr. Alex Brown needs to appraise the meeting about the current situation of the ‘Wire’ product line. To support Alex, calculate i) Break-Even Point in units and sales dollar 

ii) Target units for making $50,475 profit 

iii) CM ratio. If sales increase by $100,000; how much NOI will increase if costs remain the same. Use the incremental method. 

b) Do you think that Alex should do the analysis based on the traditional income statement to improve the situation? Justify. 

c) Ms. Linda Talwar, marketing director, proposes a fancy package with an additional cost of $1 per unit along with a $27,975 increase in the monthly salary of the sales executive will increase unit sales by 10,000 units. Comment on this proposal. 

d) Mr. Allen Walker proposes to increase the selling price rather than increase costs. He wants 0.4 as the CM ratio. What should be the revised selling price? 

e) Mr. Anil Dastugir, Finance Director, argues that neither increasing selling price nor increasing salary will work in this situation. RTM should think about automating certain parts of ‘Wire’ production by spending $49,975 per month on the fixed cost which will slash variable costs by $15.

i) Calculate BEP in units and sales dollar 

ii) Should Mr. Allen Walker accept this proposal? Please justify. 

f) RTM has another product line ‘Tool & Die’ which is much more profitable generating a 60% contribution margin. RTM is going to participate in a trade show and plans to offer a ‘Premium Package’ to attract potential customers. Ms. Linda Talwar wants to put more ‘Wire’ products into the package it generates less contribution margin (only 30%). However, Mr. Anil Dastugir wants to put more products from ‘Tool & Die’. Alex has also supported Anil. Put your opinion in this regard.

Answer rating: 100% (QA)

a BreakEven Point in units Fixed ExpensesContribution Margin per unit 35002515 23335 units BreakEven Point in sales dollars 23335 x Selling Price per ... View the full answer