The Best Team Inc., sells shoes, watches, shorts and jackets. The following is selected per-unit information for these four products:

Shoes

Watches

Shorts

Jackets

Sales Price

$50

$200

$25

$250

Variable costs and expenses

$25

$40

$15

$75

Fixed costs and expenses amount to $800,000 per month.

The Best Team has total sales of $4 million per month, of which 60 percent result from the sale of shoes, 5 percent from watches, 15 percent form shorts and the rest from the sale of jackets.

Part 1.

1.Compute separately the contribution margin ratio for each line of products.

Assuming the current sales mix, compute:

2.Average contribution margin ratio of total monthly sales.

3.Monthly operating income.

4.What is the company's operating income if monthly sales level is $2,000,000?

5.The monthly break-even sales volume (stated in dollars).

6.The company's margin of safety if current monthly sales level is $4,000,000.

7.If fixed costs would change to 540,000 what would happen with the break-even point? Explain the result.

8.If the fixed costs changed to 540,000 and sales was $4,000,000 what would happen to the operating income? Explain the result.

9.If the targeted operating income was $2,500.000 what needs to be the dollars sales volume?

10.To improve the operating income what product /products would you try to sell more of. Explain clearly why. Show also calculations to prove your reasoning,

Part 2.

Assume that through aggressive marketing The Best Team is able to shift its sales mix toward more sales of jackets. Total sales remain $4 million per month, but now 40 percent of this revenue stems from sales of jackets, shoes 40 percent, watches 10 percent and 10 percent for shorts. Fixed cost is still $800,000per month. Using the new sales mix compute:

11.Average contribution margin ratio of total monthly sales.

12.Monthly operating income.

13.The monthly break-even sales volume (stated in dollars).

14.Explain clearly why the company's financial picture changed with the new sales mix.

15.If the costs for all the products would decrease with 10 percent would the operating income then increase with 10 percent. Explain

16.Suppose that due to increased competition The Best Team needs to decrease the prices of Watches and Jackets with 30 percent. The same time the fixed cost increased to $1,200,000 otherwise everything else remains the same. Calculate the new break-even point and operating income.

17.Comment on the new results (from question 16) compared to the base case in Part 1. Has the risk profile of the company changed?