Question Two

The Ronowski Company has three product lines of belts - A, B and C - with contribution margins of $3, $2, and $1, respectively. The CEO foresees sales of 200,000 units in the coming period, consisting of 20,000 units of A, 100,000 units of B, and 80,000 units of C. The company's fixed costs for the period are $255,000. The company is subject to 25% tax rate.

REQUIRED:

A. What is the company's breakeven point in units, assuming that the given sales mix is maintained?

B. If the sales mix is maintained, what is the total contribution margin when 200,000 units are sold? What is the operating income before tax?

C. What would operating income before tax be if 20,000 units of A, 80,000 units of B and 100,000 units of C were sold? What is the new breakeven point in units if these relationships persist in the next period?

D. Does the breakeven point in C increase or decrease? Explain why this has occurred.

E. Assuming the original sales mix of 20,000 units of A, 100,000 units of B, and 80,000 units of C, how many units of each product would need to be sold to achieve a target profit of $150,000?

F. In a strategy meeting of Ronowski Company, the CEO said, "If we raise the price of our product, the company's breakeven point will be lower." The CFO responded by saying "Then we should raise our prices. The company will be less likely to make a loss." Do you agree with the CEO? Explain why. Do you agree with the CFO? Explain why.