EXERCISE 4–16 Break-Even and Target Profit Analysis [LO4, LO5, LO6] Bait-N-Tackle sells fishing equipment

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EXERCISE 4–16 Break-Even and Target Profit Analysis [LO4, LO5, LO6]

Bait-N-Tackle sells fishing equipment. One of the company’s products, a basic tackle box, sells for $48 per unit. Variable expenses are $36 per tackle box, and fixed expenses associated with the tackle box total $18,000 per month.

Required:

1.               Compute the company’s break-even point in number of tackle boxes and in total sales dollars.

2.               If the variable expenses per tackle box increase as a percentage of the selling price, will it result in a higher or a lower break-even point? Why? (Assume that the fixed expenses remain unchanged.)

3.               At present, the company is selling 2,600 tackle boxes per month. The sales manager is convinced that a 12.5% reduction in the selling price will result in a 20% increase in the number of tackle boxes sold each month. Prepare two contribution income statements, one under current operating conditions, and one as operations would appear after the proposed changes. Show both total and per unit data on your statements.

4.               Refer to the data in (3) above. How many tackle boxes would have to be sold at the new selling price to yield a minimum operating income of $14,400 per month?

5.               Refer to the data in (3) above. How many tackle boxes would have to be sold at the new selling price to generate after-tax operating income of $16,800 if the tax rate is 30%?