The new CEO of Rusty Manufacturing has asked for a variety of information about the operations of the firm from last year. The CEO is given the following information, but with some data missing:

Total sales revenues ?

Number of units produced and sold 500,000 units

Selling price ?

Operating income $180,000

Total investment in assets $2,250,000

Variable cost per unit $4.00

Fixed costs for the year $2,500,000

1.

Find (a) total sales revenue, (b) selling price, (c) rate of return on investment, and (d) markup percentage on full cost for this product.

2.

The new CEO has a plan to reduce fixed costs by $225,000 and variable costs by $0.30 per unit while continuing to produce and sell 500,000 units. Using the same markup percentage as in requirement 1, calculate the new selling price.

3.

Assume the CEO institutes the changes in requirement 2 including the new selling price. However, the reduction in variable cost has resulted in lower product quality resulting in 5% fewer units being sold compared to before the change. Calculate operating income (loss).

4.

What concerns, if any, other than the quality problem described in requirement 3, do you see in implementing the CEO's plan? Explain briefly.

equirement 1. Find (a) total sales revenue, (b) selling price, (c) rate of return on investment, and (d) markup percentage on full cost for this product.

Begin by calculating the (a) total sales revenue. Rearrange the income statement formula to solve for the amount.

Sales revenue

Part 2

(Round your answer to the nearest cent.)

(b) The selling price per unit is

.

Part 3

(c) Calculate the rate of return on investment.

Determine the formula you will use and then enter the amounts. (Round the return on investment to the nearest whole percentage.)

(

)

=

Return on investment

Part 4

(

)

=

%

Part 5

(d) Calculate the markup percentage on full cost for this product.

Determine the formula you will use and then enter the amounts. (Enter the per unit amounts to the nearest cent. Enter the markup as a percentage rounded to two decimals.)

(

)

=

Markup on full costs

Part 6

(

)

=

%

Part 7

Requirement 2. The new CEO has a plan to reduce fixed costs by

$225,000

and variable costs by

$0.30

per unit while continuing to produce and sell

500,000

units. Using the same markup percentage as in requirement 1, calculate the new selling price.

Begin by calculating the new total revenues. (Round your answer to the nearest whole dollar.)

New fixed costs
New total variable costs
New total costs
Markup percentage
New total revenues

Part 8

(Round your answer to the nearest cent.)

The new selling price is

.

Part 9

Requirement 3. Assume the CEO institutes the changes in requirement 2 including the new selling price. However, the reduction in variable cost has resulted in lower product quality resulting in

5%

fewer units being sold compared to before the change. Calculate operating income (loss). (Enter operating losses with a minus sign or parentheses.)

Sales revenue
Variable costs
Contribution margin
Fixed costs
Operating income (loss)

Part 10

Requirement 4. What concerns, if any, other than the quality problem described in requirement 3, do you see in implementing the CEO's plan? Explain briefly.

A.

The CEO has not considered outsourcing manufacturing work to decrease wages. The concern the CEO must ask is "Will outsourcing manufacturing cause the work to be lower quality?".

B.

The CEO has not considered implementing an employee teamwork scenario. The concern the CEO must ask is "Will the employees be open to working on projects in a team setting?".

C.

The CEO has not considered inflation in manufacturing supply prices. The concern the CEO must ask is "Will they be forced to raise prices due to inflation but competitors not raise prices?".

D.

The CEO has not considered customers in these pricing decisions. The concern the CEO must ask is "Will customers continue to want the product at these prices?".