Riggs and Murtaugh Engine Inc. (RME) is suffering from the effects of increased local and global competition for its main product, a lawn mower that is sold in discount stores throughout the United States. The following table shows the results of RME's operations for 2018.

Sales (13,000 units x $83)

$1,079,000

Variable costs (13,000 units x $62)

806,000

Contribution margin

273,000

Fixed costs

275,000

Operating profit (loss)

(2,000)

1. Compute RME's breakeven point in both units and dollars and compute the contribution margin ratio.
2. What would be the required sales, in units and in dollars, to generate a pretax profit of $50,000?
3. Assume a combined income tax rate of 25%. What would be the required sales volume, in both units and in dollars, to generate an after-tax profit of $50,000?
4. Refer to the original data.The manager believes that a $45,000 increase in advertising would result in a $180,000 increase in annual sales. If the manager is right, what will be the effect on the company's operating profit or loss?
5. Refer to the original data. The vice president in charge of sales feels that a 5% reduction in price in combination with a $40,000 increase in advertising will cause unit sales to increases by 40%. What effect would this strategy have on operating profit (loss)?
6. Refer to the original data. During 2018, RME saved $5 of unit variable costs per lawn mower by buying from a different manufacturer. However, the cost of changing the plant machinery to accommodate the new part cost an additional $50,000 in fixed cost per year. Was this a wise change? Why or why not?

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