Tony Tank, president of Rambo Recreation Products, Inc. is concerned about decli
ID: 2538804 • Letter: T
Question
Tony Tank, president of Rambo Recreation Products, Inc. is concerned about declines that he is beginning to see in the demand for the company's line of old school log basketballs as new competitors enter the market. At ta current contribution margin of $8, the company must sel 81,250 basketballs to generate the desired $200,000 in annual operating income. Based on a recent market research report, Anthony thinks the company can expect annual sales of only 65,000 basketballs in the future. 2. Required a. What is Tony's current level of fixed expenses? b. What is Tony's current breakeven point?Explanation / Answer
a.
Contribution margin
8
Number of basketball must be sold to earn $200000
81250
We know that contribution is operating profit + fixed costs thus, the fixed cost will be
Total contribution
650000
Less: Expected operating profit at the above level
200000
Fixed costs
450000
Current level of fixed expenses of Tony is $450000
b.
Fixed cost
450000
Contribution margin
8
Breakeven point (Units)
56250
c.
Fixed costs
450000
Add: Expected operating income
200000
Total contribution required
650000
Number of units to be sold
65000
Contribution margin
10
d.
Tony will have to increase the sale price of basketball by $2 per unit
e.
Tax rate
30%
Desirable net income after tax
175000
Add: Tax
75000
(175000X30/70)
Annual net income before tax
250000
Add; Fixed costs
450000
700000
Contribution margin
8
Number of basket balls to be sold
87500
(700000/8)
a.
Contribution margin
8
Number of basketball must be sold to earn $200000
81250
We know that contribution is operating profit + fixed costs thus, the fixed cost will be
Total contribution
650000
Less: Expected operating profit at the above level
200000
Fixed costs
450000
Current level of fixed expenses of Tony is $450000
b.
Fixed cost
450000
Contribution margin
8
Breakeven point (Units)
56250
c.
Fixed costs
450000
Add: Expected operating income
200000
Total contribution required
650000
Number of units to be sold
65000
Contribution margin
10
d.
Tony will have to increase the sale price of basketball by $2 per unit
e.
Tax rate
30%
Desirable net income after tax
175000
Add: Tax
75000
(175000X30/70)
Annual net income before tax
250000
Add; Fixed costs
450000
700000
Contribution margin
8
Number of basket balls to be sold
87500
(700000/8)