Aqua Inc, in business since 2008, makes swim wear for profession alathletes. Analysis of the firm's financial records for the current year reveals the following:
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Average swimsuit selling price
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$70
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Variable swimsuit expenses
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Direct material
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28
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Direct labor
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12
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Variable overhead
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8
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Annual fixed costs
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Production
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$10,000
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Selling & Administrative
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24,000
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The company's tax rate is 40 percent. Vicky Walters, company president, asked you to help her answer the following questions.
a. What is the break-even point in number of swim suits and in dollars?
b. How much revenue must be generated to produce $40,000 of pre-tax earnings? How many swimsuits would this level of revenue represent?
c. How much revenue must be generated to produce $40,000 of after-tax earnings? How many swimsuits would this represent?
d. What amount of revenue would be necessary to yield an after-tax profit equal to 20 percent of revenue?
e. Aqua Gear is considering purchasing a much faster sewing machine that will save $6 per swimsuit in cost but will raise annual fixed production cost by $40,000. If the equipment is purchased, the company expects to make and sell an additional 5,000 swimsuits. Should the company make this investment?
f. A marketing consultant told Aqua Inc managers that they could increase the number of swimsuits sold by 30 percent if the selling price was reduced by 10 percent and the company spent $10,000 on advertising. The company has been selling 3,000 swimsuits. Should the company make the changes advised by the consultant?