The following data pertains to Al Hashem Company which manufactures and sells a single product as follows:
Fixed costs $32,000 per month
Variable costs $3 per unit
Selling price $5 per unit
Estimated sales 20,000 units
Required:
1. Calculate the break-even point, the margin of safety, and the anticipated profit at the estimated sales volume.

2. The company is considering increasing the selling price to $5.50. At this price it expects to sell 18,000 units.
(a) Recalculate the break-even point, the margin of safety, and the anticipated profit.
(b) What effect would the price change have on the operating leverage?
(c) How many units would have to be sold at the new price to produce a 10% percent increase in total profit before taxes?
(d) How many units would have to be sold at the new price to produce a 10% percent increase in total profit after taxes? Assume tax rate is 30%.

3. The sales manager has offered a counterproposal. The price would be reduced to $4.60, and an additional $4,000 a month would be spent on advertising.
(a) Recalculate the break-even point.
(b) What effect would this change have on operating leverage?
(c) How many units would have to be sold at the new price to produce a 10% percent increase in total profit before taxes?
(d) How many units would have to be sold at the new price to produce a 10% percent increase in total profit after taxes? Assume tax rate is 30%.

Answer rating: 100% (QA)

The detailed answer for the above question is provided below 1 Breakeven Point 32000 5 3 1... View the full answer