Question 4 Cost-Volume-Profit Relationships (15 marks)

Ground Inc. sells one air mattress for $120. Variable expenses are $70 per air mattress, while total fixed expenses per month are $25,000. Currently, the company sells 450 air mattresses per month.

Required:

a) Calculate the companys break-even point in unit sales and in dollars (4 marks).

b) The marketing manager proposed reducing the selling price per air mattress by 5%. He believes doing so will result in a 20% increase in the number of air mattresses sold per month. Total fixed costs will remain unchanged. Should this proposal be accepted? Make sure your analysis shows the effect on operating income (6.5 marks).

c) Refer to the original data. Calculate the companys margin of safety in dollars and percentage (if any margin of safety exists). Explain (2.5 marks).

d) Refer to the data in b) above. How many air mattresses would the company have to sell at the proposed selling price to make a target profit of $5,000 per month? ignore taxes (2 marks).