Racine Tire Co. manufactures tires for all-terrain vehicles. The tires sell for
ID: 2386817 • Letter: R
Question
Racine Tire Co. manufactures tires for all-terrain vehicles. The tires sell for $60 and variable cost per tire is $30; monthly fixed cost is $450,000.
a. What is the break-even point in units?
tires
What is the break-even point in sales dollars?
$
b. If Ronnie Rice, the company's CEO, wants the business to earn a pre-tax profit of 25 percent of revenues, how many tires must be sold each month?
units
c. If the company is currently selling 20,000 tires monthly, what is the degree of operating leverage?
d. If the company can increase sales volume by 15 percent above the current level, what will be the increase in net income?
$
What will be the new net income be?
Racine Co.
Income Statement
For the Month
Current
Proposed
Sales
Less variable expense
Contribution Margin
Less Fixed Costs
Net Income
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Explanation / Answer
Racine Tire Co. manufactures tires for all-terrain vehicles. The tires sell for $60 and variable cost per tire is $30; monthly fixed cost is $450,000.
Contribution Margin per unit = $60 - $30 = $30
Contribution margin ratio = $30 / $60 = 50%
Contribution Margin per unit with desired profi = $60 - $30 - ($60 x 25%) = $15
a. What is the break-even point in units?
15,000 tires
Break-even sales(units) = Fixed cost / CM per unit
= $450,000 / $30 = 15,000 tyres
What is the break-even point in sales dollars?
$900,000
Break-even sales(dollars) = Fixed cost / CM Ratio
= $450,000 / 50% = $900,000
Alternatively 15,000 tyres @ $60 = $900,000
b. If Ronnie Rice, the company's CEO, wants the business to earn a pre-tax profit of 25 percent of revenues, how many tires must be sold each month?
units
Break-even sales(units) = Fixed cost / CM per unit with desired profit
= $450,000 / $15 = 30,000 tyres
c. If the company is currently selling 20,000 tires monthly, what is the degree of operating leverage?
Contribution Margin = 20,000 x $30 = $600,000
Net Income = $600,000 - $450,000 = $150,000
Degree of operating leverage = Contribution / Net Income
= $600,000 / $150,000 = 4
d. If the company can increase sales volume by 15 percent above the current level, what will be the increase in net income?
$240,000
What will be the new net income be?
Racine Co.
Income Statement
For the Month
Current Poposed
Sales $1,200,000 $1,380,000
Less variable expense $600,000 $690,000
Contribution Margin $600,000 $690,000
Less Fixed Costs $450,000 $450,000
Net Income $150,000 $240,000
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