Jonesmith, Inc., incurs $30 per unit in variable costs, and $500,000 in total fixed costs. Each unit sells for $80. Jonesmith is considering making an investment that would increase fixed costs by

$50,000, but decrease variable costs by $2 per unit.

Calculate the following:

yy Before-tax profit if Jonesmith sells 20,000 units yy Before-tax profit if Jonesmith earns revenue of $2,000,000 yy The units Jonesmith needs to sell to break even yy The revenues Jonesmith needs to earn to break even yy The units Jonesmith needs to sell to achieve $200,000 in before-tax profit.

yy The revenues Jonesmith needs to earn to achieve $400,000 in before-tax profit.

yy The unit sales at which Jonesmith would be indifferent between making and not making the new investment.

Calculate the before-tax profit if Jonesmith sells 20,000 units:

yyUCM = $80 – $30 = $50 yy Profit = $50 x 20,000 – $500,000 = $500,000 Calculate the before-tax profit if Jonesmith earns revenue of $2,000,000:

yy CMR = $50 / $80 = 62.5%

yy Profit = 62.5% x $2,000,000 – $500,000 = $750,000 Calculate the units Jonesmith needs to sell to break even:

yy $500,000 / $50 = 10,000 Calculate the revenues Jonesmith needs to earn to break even:

yy $500,000 / 62.5% = $800,000 Calculate the units Jonesmith needs to sell to achieve $200,000 in before-tax profit:

yy ($200,000 + $500,000) / $50 = 14,000 Calculate the revenues Jonesmith needs to sell to achieve $400,000 in before-tax profit:

yy ($400,000 + $500,000) / 62.5% = $1,440,000 Calculate the unit sales at which Jonesmith would be indifferent between making and not making the new investment:

yyNew UCM = $80 – 28 = $52; New FC = $500,000 + $50,000 = $550,000 yy $50 x Units – $500,000 = $52 x Units – $550,000; Units = 25,000