Problem 5-1

Redlands Inc. sells one product for $5. The variable cost per item is $3, and the fixed costs for the firm are $40. Required:

a. Compute the breakeven point in units.

b. Compute the number of units and sales revenue needed to achieve a $20 profit. (Ignore income taxes.)

c. Assume that the income tax rate for Redlands is 40%. Compute the number of units and sales revenue needed to achieve an $18 net profit.

d. Compute the number of units and sales revenue needed to achieve an 8% profit margin. (Ignore income taxes.)

e. Compute the number of units and sales revenue needed to achieve a 12% net profit margin. (Assume a 40% income tax rate.)

f. Assume that Redlands currently sells 40 units. Redlands estimates that if it increased sales price to $6 per unit demand would decrease by 10%. Determine if Redlands should increase its selling price. (Ignore income taxes.)

g. Assume that Redlands currently sells 30 units and has a 40% income tax rate. The firm estimates that a $25 increase in fixed cost from automating the plant would lower variable costs to $2 per unit. Determine if Redlands should change its cost structure.