1. Tess\'s Test Prep services school districts that wish to assess students\' re
ID: 2538776 • Letter: 1
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1. Tess's Test Prep services school districts that wish to assess students' reading and mathematical abilities. Last year Tess evaluated 60,000 math tests and 20,000 reading tests. An income statement for the year follows. Total Total Per Unit Total Per UnitCompany $1,920,000 1.200,000 720,000 360,000 360,000 $1,200,000 $20 $720,000$36 Sales Revenue Variable Expenses840,000 14 Contribution Margin 360,000 $6 360,000 $18 Fixed Expenses 360,000 18 Operating Income Required a. What is Tess's breakeven point in sales dollars? b. In an effort to raise the demand for reading tests, managers are planning to lower the price from $36 per test to $20 per test, the current price of the math test. They believe that doing so will increase the demand for reading tests to 60,000. Prepare a contribution format income statement reflecting Tess's new pricing and demand structure. What will be Tess's breakeven point in sales dollars if this change is implemented? Do you recommend that Tess make the change? c. Tony Tank, president of Rambo Recreation Products, Inc. is concerned about declines that he is beginning to see in the demand for the company's line of old school log basketballs as new competitors enter the market. At ta current contribution margin of $8, the company must sell 81,250 basketballs to generate the desired $200,000 in annual operating income. Based on a recent market research report, Anthony thinks the company can expect annual sales of only 65,000 basketballs in the future. 2. Required a. What is Tony's current level of fixed expenses? b. What is Tony's current breakeven point?Explanation / Answer
Q1 Req A: Contribution: $ 720,000 Revenue: $ 1920,000 CM ratio: Contnribution/ Revenue *100 (720,000 /1920,000) *100 = 37.5% Breake even in $: Fixed cost / CM ratio = $ 360,000 /37.5% = $ 960,000 Req B: Math Reading Total Total Per unit Total Per unit Sales revenue 1,200,000 20 1200000 20 2,400,000 Less: variable cost 840000 14 1080000 18 1920000 Contnribution margin 360000 120000 480,000 Less: fixed expense 360,000 Net income 120,000 Req C: Revised: $ 480,000 /2400,000 = 20% Break even in $: $ 360,000 /20%: $ 1800,000 No we donot recommend the change
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