Problem: Green Shades Inc. (GSI) sells hammocks; variable costs are $75 each, and the hammocks are sold for $125 each. GSI incurs $250,000 of fixed operating expenses annually.
Required:
a. Determine the sales volume in units and dollars required to attain a $50,000 profit. Verify your answer by preparing an income statement using the contribution margin format.
b. GSI is considering implementing a quality improvement program. The program will require a $10 increase in the variable cost per unit. To inform its customers of the quality improvements, the company plans to spend an additional $20,000 for advertising. Assuming that the improvement program will increase sales to a level that is 3,000 units above the amount computed in Requirement a, should GSI proceed with plans to improve product quality? Support your answer by preparing a budgeted income statement.
c. Determine the new break-even point in units and sales dollars as well as the margin of safety percentage, assuming that the quality improvement program is implemented.
d. Prepare a break-even graph using the cost and price assumptions outlined in Requirement b.