Diba takes Kelly’s “advice.” He reports a variable cost of $16.80 per treatment in the proposal. Although he feels uneasy about this, he is comforted by the fact that he will flag the

$9.60 amount to the executive committee in his forthcoming oral presentation.

One month later, Kelly walks into Diba’s office. $he is in a buoyant mood and announces she has just come back from an executive committee meeting that approved the Vital Hair pro¬

posal. Diba asks why he was not invited to the meeting. Kelly says the meeting was held in Toronto, and she decided to save the division money by going alone. $he then says to Diba that it “was now time to get behind the new venture and help make it the success the committee and her team members believe it will be.”

Required 1. What is the breakeven point (in units of monthly treatments) when WWD’s variable costs

(a) include the $9.60 estimate and

(b) exclude the $9.60 estimate for potential product litiga¬

tion costs?

2. $hould Diba have excluded the $9.60 estimate in his report to the executive committee of WWD? Explain your answer.

3. What should Diba do in response to Kelly’s decision to make the Vital Hair presentation on her own?

Ethics, CVP analysis. Allen Corporation produces a moulded plastic casing LX201, for desktop computers, fiummary data from its year 2007 income statement are as follows:

Revenues $6,000,000 Variable costs 3,600,000 Fixed costs 2,592,000 Operating income $ (192,000)

Jane Woodall, Allen’s president, is very concerned about Allen’s poor profitability. $he asks Max Lemond, production manager, and Lester Bush, controller, to see if there are ways to reduce costs.

After two weeks, Max returns with a proposal to reduce variable costs to 52% of rev¬

enues by reducing the expenses Allen currently incurs for safe disposal ofwasted plastic. Lester is concerned that this would expose the company to potential environmental liabilities. He tells Max, “We would need to estimate some ofthese potential future costs and include them in our analysis.” “You can’t do that,” Max replied. “We are not violating any laws. There is some possibility that we may have to incur costs in the future, but ifwe bring it up now, this proposal will not go through because our senior management always assumes these costs to be larger than they are. The market is very tough and we are in danger ofshutting down the company.

We don’t want all our colleagues to lose their jobs. The only reason our competitors are mak¬

ing money is because they are doing exactly what I am proposing.”

Required 1. Calculate Allen’s breakeven revenues for the year 2007.
2. Calculate Allen’s breakeven revenues if variable costs are 52% ofrevenues.
3. Calculate Allen’s operating income in 2007 if variable costs had been 52% ofsales.
4. Given Max Lemond’s comments, what should Lester Bush do?
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