Question 2

Awesome Axes sells electric guitars. The company sells three models of guitar: Enthusiast, Jammer and Pro.

Information relating to next year's budget for the three models follows:

Enthusiast Jammer Pro.

Expected sales (units) 600 350 50

Sales price $200 $500 $3,000

Variable costs $120 $200 $800

The company has annual fixed costs of $200,000 and a tax rate of 25%.

Required:

a) Compute the company's expected profit (net income) for the upcoming fiscal period.

b) Compute the company's sales mix.

c) Assuming a consistent sales mix, how many units of each product type must the company

sell to break even?

d) Assuming a consistent sales mix, if the company wishes to earn net income of $300,000 (after tax)

how many units of each product type must be sold?

e) Compute the margin of safety in both dollar and percentage

f) Briefly explain which cost assumptions are valid while applying cvp model.