Question 2 CVP

Next Wave Inc. manufactures recreational equipment. One of the companys products, a skateboard, sells for $37.50. The skateboards are manufactured in an antiquated plant that relies heavily on direct labour workers. Thus, variable costs are high, totaling $22.50 per skateboard.

Over the past year the company sold 40,000 skateboards, with the following operating results:

Sales (40, 000 skateboards) $1,500,000

Less variable expenses 900,000

Contribution margin 600,000

Less fixed expenses 480,000

Income before taxes $ 120,000

Management is anxious to maintain and perhaps even improve its present level of income from the skateboards.

REQUIRED: Show all calculations. (Round to nearest 2 decimal places)

Compute the CM ratio and the break-even point in skateboards (Units).

Calculate Margin of Safety in dollars.

Due to an increase in labour rates, the company estimates that variable costs will increase by $3 per skateboard next year. If this change takes place and the selling price increases by 10%, what is the effect on income of these changes?

Refer to the original data. If the companys income tax rate is 15% and the company wants to earn $125,000 after tax, calculate the level of sales dollars required to achieve that target.

Refer to the original data. If the companys income tax rate is 15% and the company wants to earn 10% after tax, calculate the level of sales dollars required to achieve that target.

Refer to the original data. The company is considering the construction of a new, automated plant to manufacture the skateboards. The new plant would slash variable costs by 40%, but it would cause fixed costs to increase by 90%. If the new plant is built, what would be the effect on income?