Case Scenario:
Gigi LeBlanc founded a company to produce a special bicycle suspension system several years ago after her son, who worked for a bicycle delivery service, was hurt in a riding accident. The market's response has been overwhelmingly favorable to the company's new suspension system. Riders report feeling that they experience fewer "unpredictable" bumps than with traditional suspension systems. Gigi made an initial investment of $100,000 and has set a target of earning a 30 percent return on her investment. Gigi expects her company to sell approximately 10,000 suspension systems in the coming year. Based on this of activity, variable manufacturing costs will be $5 for each suspension system. Fixed selling and administrative expenses will be $2 per system and other fixed costs will be $1 per system.
Required:
Q1. Calculate the sales price that Gigi LeBlanc's company must charge for a suspension system if she is to earn a 30 percent return on her investment.
Q2. Calculate the company's break-even point.
Q3. Assuming Gigi's company maintains the current activity level, how can she increase her return on investment to 35 percent?