Suppose that after Noah’s Bark (in | 1-38) has been in business for a year, you and your brother Noah decide to sell beagles in addition to Labrador retrievers. Each beagle sells for $150, requires $60 of variable cost, and eafns a contribution margin of $90. Each Labrador retriever still sells for $350, requires $210 of variable cost, and earns a contribution margin of $140. The contribution margin earned by Noah’s Bark in the second year of business from beagles, from Labrador retrievers, and in total is shown here:

Labrador Retrievers Beagles Total Sales (dogs) 600 200 800 Sales revenue $210,000 $30,000 $240,000 Less variable costs (126,000) (12,000) (138,000)

Contribution margin $ 84,000 $18,000 $102,000 Assume that fixed costs for Noah’s Bark are now $76,500 per year.

Required: (1) Compute the break-even point (in sales dollars).

(2) What must sales be (in dollars) for Noah’s Bark to earn $30,000 pretax income?

(3) What is the break-even point in beagles and Labs?

(4) How many beagles and Labs must Noah’s Bark sell to earn a pretax income of $30,000?

(5) How many beagles and Labs must it sell to earn a net income of $30,000?

The income tax rate is 40%.

Suppose you and your brother are considering three independent alternative plans (only one of which will be followed) that you believe may raise the company’s income. These plans are as follows:

(a) Raise the selling price of the Labs to $450 per dog. With this alternative, variable costs per dog and total fixed costs do not change.

Purchase only those Labrador retrievers that are descendants of American Kennel Club (AKC) ribbon winners, thus increasing the variable cost to $240 (these dogs can be purchased for $150 each). You are considering this alternative because you think the perceived improvement in the purity of the breed will increase the sales volume of dogs. With this change, neither the selling price per unit nor the total fixed cost changes.

Increase total fixed costs by spending $1,000 more on advertising. With this alternative, the selling price per unit and the variable costs per unit do not change.

(b —

— (c Required: (6) Based on C-V-P analysis alone, which plan should you choose? Why?

(7) What other factors might you want to consider in making this choice?  Lo1