Practice 3:

Bob Company, a sole proprietorship, sells only one product. The regular price is $160. Variable costs are 55% of this selling price, and fixed costs are $8,400 a month.

Management decides to decrease the selling price from $160 to $145 per unit. Assume that the cost of the product and the fixed operating expenses are not changed by this pricing decision.

(a)At the original selling price of $160 a unit, what is the contribution margin ratio? ________%

(b)At the original selling price of $160 a unit, what dollar volume of sales per month is required for Bob Company to break-even? (Round your answer to the nearest whole dollar.) $________

(c)At the original selling price of $160 a unit, what dollar volume of sales per month is required for Bob Company to earn a monthly operating income of $6,500? (Round your answer to the nearest whole dollar.) $________

(d)At the reduced selling price of $145 a unit, what is the contribution margin ratio? ________%

(e)At the reduced selling price of $145 a unit, what dollar volume of sales per month is required to break-even? (Round your intermediate percentage to one decimal place and final answer to the nearest whole dollar.) $________

(f)While questioning management's sanity in making this decision, you pause to consider whether it is ever a good idea to adjust prices to the point where you are making less money.Provide 2 possible explanations why Bob may have been justified in their decision to reduce the price.