The following information applies to the questions displayed below.] Horton Manu
ID: 2440482 • Letter: T
Question
The following information applies to the questions displayed below.]
Horton Manufacturing Inc. (HMI) is suffering from the effects of increased local and global competition for its main product, a lawn mower that is sold in discount stores throughout the United States. The following table shows the results of HMI’s operations for 2019:
Required:
1. Compute HMI’s breakeven point in both units and dollars. Also, compute the contribution margin ratio.
2. What would be the required sales, in units and in dollars, to generate a pretax profit of $30,000?
3. Assume an income tax rate of 40%. What would be the required sales volume, in both units and dollars, to generate an after-tax profit of $30,000?
4. Prepare a contribution income statement as a check for your calculations in requirement 3.
5. The manager believes that a $60,000 increase in advertising would result in approximately a $200,000 increase in annual sales. If the manager is right, what will be the effect on the company’s operating profit or loss?
6. Refer to the original data. The vice president in charge of sales feels that a 10% reduction in price in combination with a $73,000 increase in advertising will cause unit sales to increases by 25%. What effect would this strategy have on operating profit (loss)?
Sales (19,500 units @ $84) $ 1,638,000 Variable costs (19,500 @ $63) 1,228,500 Contribution margin $ 409,500 Fixed costs 443,100 Operating profit (loss) $ (33,600 )Explanation / Answer
Solution 1:
Selling price per unit = $84
Variable cost per unit = $63
Contriution margin per unit = $84 - $63 = $21
Contribution margin ratio = Contribution margin per unit / Selling price per unit = $21/$84 = 25%
Breakeven point in unit = Fixed cost / contribution margin per unit = $443,100 / $21 = 21100 units
Breakeven point in dollar = Fixed cost / contribution margin ratio = $443,100 / 25% = $1,772,400
Solution 2:
Required sales in unit to generate target profit = (target profit + Fixed cost) / contribution margin per unit
= ($30,000 + $443,100) / $21 = 22529 units
Required sales in dollar to generate target profit = (target profit + Fixed cost) / contribution margin ratio
= ($30,000 + $443,100) / 25% = $1,892,400
Solution 3:
Target after tax profit = $30,000
Income tax rate = 40%
Required pre tax profit = $30,000 / (1-0.40) = $50,000
Required sales in unit to generate target profit = (target profit + Fixed cost) / contribution margin per unit
= ($50,000 + $443,100) / $21 = 23481 units
Required sales in dollar to generate target profit = (target profit + Fixed cost) / contribution margin ratio
= ($50,000 + $443,100) / 25% = $1,972,400
Solution 4:
Note: I have answered first 4 parts of the question as per chegg policy, kindly post separate question for answer of remaining parts.
Contribution margin income statement - HMI Particulars Amount Sales (23481 * $84) $1,972,404.00 Variable cost (23481*$63) $1,479,303.00 Contribution margin $493,101.00 Fixed costs $443,100.00 Pre tax income $50,001.00 Income tax (40%) $20,000.40 Net Income $30,000.60Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.