Horton Manufacturing Incorporated (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 the most recent year: Sales (12,500 units @ $84) $ 1,050,000 Variable costs (12,500 @ $63) 787,500 Contribution margin $ 262,500 Fixed costs 296,100 Operating profit (loss) $ (33,600) 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?
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Horton Manufacturing Incorporated (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 the most recent year:
| Sales (12,500 units @ $84) | $ 1,050,000 |
|---|---|
| Variable costs (12,500 @ $63) | 787,500 |
| Contribution margin | $ 262,500 |
| Fixed costs | 296,100 |
| Operating profit (loss) | $ (33,600) |
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 $40,000 increase in advertising will cause unit sales to increases by 25%. What effect would this strategy have on operating profit (loss)?
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