6PSB
ExpertverifiedThis year Best Company earned a disappointing 5.6% aftertax return on sales (net income/sales) from marketing 100,000 units of its only product. The company buys its product in bulk and repackages it for resale at the price of $20 per unit. Best incurred the following costs this year
Total variable unit costs  $800,000 
Total variable packaging costs  $100,000 
Fixed costs  $950,000 
Income tax rate  25% 
The marketing manager claims that next year’s results will be the same as this year’s unless some changes are made. The manager predicts the company can increase the number of units sold by 80% if it reduces the selling price by 20% and upgrades the packaging. This change would increase variable packaging costs by 20%. Increased sales would allow the company to take advantage of a 25% quantity purchase discount on the cost of the bulk product. Neither the packaging change nor the volume discount would affect fixed costs, which provide an annual output capacity of 200,000 units.
Required
1. Compute the breakeven point in dollar sales under the (a) existing business strategy and (b) new strategy that alters both unit selling price and variable costs. (Round answers to the next whole dollar.)
2. Prepare a forecasted contribution margin income statement with two columns showing the expected results of (a) the existing strategy and (b) changing to the new strategy. The statements should report sales, total variable costs (unit and packaging), contribution margin, fixed costs, income before taxes, income taxes, and net income. Also, determine the aftertax return on sales for these two strategies.
Breakeven dollar sales:
Existing strategy: $1,727,273
New strategy: $1,727,273
Net income:
Existing strategy: $112,500
New strategy: $475,500
The line item representing the sales revenue generated over the variable cost incurred in the production process is known as the contribution margin. Variable cost includes expenses relating to labor and material.
(a) Existing business strategy
Calculation of variable cost per unit:
Particular  Amount $  /  Units  =  Per unit 
Total variable unit costs  $800,000  /  100,000  =  $8 
Total variable packaging costs  $100,000  /  100,000  =  $1 
$9 
Calculation of contribution margin ratio:
Breakeven dollar sales:
(b) New business strategy:
Calculation of new variable cost:
Particular  Amount $  /  Units  X  Percentage after increase or decrease  =  Per unit 
Total variable unit costs  $800,000  /  100,000  X  75%  =  $6 
Total variable packaging costs  $100,000  /  100,000  X  120%  =  $1.2 
X  $7.2 
Calculation of contribution margin ratio:
Breakeven dollar sales:
Particular  Existing strategy  New strategy 
Sales  $2,000,000  $2,880,000 
Less: Variable cost  (900,000)  (1,296,000) 
Contribution margin  1,100,000  1,584,000 
Less: Fixed cost  (950,000)  (950,000) 
Pretax income  150,000  634,000 
Less: Income tax  (37,500)  (158,500) 
Net income  $112,500  $475,500 
R&R Tax Service offers tax and consulting services to individuals and small businesses. Data for fees and costs of three types of tax returns follow. R&R provides services in the ratio of 5:3:2 (easy, moderate, business). Fixed costs total $18,000 for the tax season. Use this information to determine the (1) selling price per composite unit, (2) variable costs per composite unit, (3) breakeven point in composite units, and (4) number of units of each product that will be sold at the breakeven point.
Types of return  Fee charged  Variable cost per return 
Easy (Form 1040EZ)  $50  $30 
Moderate (Form 1040)  125  75 
Business  275  100 
SBD Phone Company sells its waterproof phone case for $90 per unit. Fixed costs total $162,000, and variable costs are $36 per unit. How will the breakeven point in units change in response to each of the following independent changes in selling price per unit, variable cost per unit, or total fixed costs? Use I for increase and D for decrease. (It is not necessary to compute new breakeven points.)
Change  Breakeven in unit will 
1. Total fixed cost to $190,000 

2. Variable cost to $34 per unit 

3. Selling price per unit to $80 

4. Variable cost to $67 per unit 

5. Total fixed cost to $150,000 

6. Selling price per unit to $120 

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