Aqua Gear, in business for 20 years, makes swimwear for professional athletes. Analysis of the firm’s financial records for the current year reveals the following:
Average swimsuit selling price ........ $ 70
Variable swimsuit expenses
Direct material ............. $ 28
Direct labor ............... 12
Variable overhead ............. 8
Annual fixed cost
Selling ................ $ 10,000
Administrative .............. 24,000
The company’s tax rate is 40 percent. Samantha Waters, company president, has asked you to help her answer the following questions. (Round CM% to the nearest tenth of a percent and BE in units to the nearest whole unit.)
a. What is the break- even point in number of swimsuits and in dollars?
b. How much revenue must be generated to produce $ 40,000 of pre-tax earnings? How many swimsuits would this level of revenue represent?
c. How much revenue must be generated to produce $ 40,000 of after- tax earnings? How many swimsuits would this represent?
d. What amount of revenue would be necessary to yield an after- tax profit equal to 20 percent of revenue?
e. Aqua Gear is considering purchasing a faster sewing machine that will save $ 6 per swimsuit in cost but will raise annual fixed cost by $ 40,000. If the equipment is purchased, the company expects to make and sell an additional 5,000 swimsuits. Should the company make this investment?
f. A marketing consultant told Aqua Gear managers that they could increase the number of swimsuits sold by 30 percent if the selling price was reduced by 10 percent and the company spent $ 10,000 on advertising. The company has been selling 3,000 swimsuits. Should the company make the changes advised by the consultant?