Questions -
Data for all questions: Rachel's Racquets produces racquetball racquets. Their racquetball racquets are sold at many local sporting goods stores. The cost of manufacturing and marketing their racquetball racquets, at their normal factory volume of 5,000 racquets per month, is shown in the table below. These racquets sell for $25 each. Rachel's Racquets is making a small profit, but would prefer to increase profitability.
(Note: Fixed costs are shown on a per-unit basis in the table based on normal volume. However, fixed costs as a total do not change when volume changes, so you will need to determine total fixed costs first.)
Question 1: What is the break-even point? A) In units? B) In sales dollars?
Question 2: A large school district has offered to purchase 3,000 racquets (one time to start up a racquetball program) if the sales price was lowered to $22 per racquet. Rachel's Racquets' maximum capacity is 6,000 units. A) Based on the cost data provided, what would be the impact of the price decrease on sales, costs, and operating income if Rachel's Racquets accepted this sale? Use a contribution margin income statement to show your results. B) Do you think Rachel's Racquets should accept this sale? Support your decision with evidence and analysis.
Question 3: Research has shown that there is a need for a new tennis racquet on the market. Rachel's Racquets would be able to produce a tennis racquet that meets the market need on their existing assembly line if they purchased a new machine to fabricate the different shaped handles. This would increase fixed overhead costs by $50,000 per month (still based on normal production volume of 5,000 units). The variable materials costs for the tennis racquets would also be double the cost of the variable materials for the racquetball racquets. Maximum production for both types of racquets together would still be 6,000 units because the same assembly line would be used. The tennis racquets would sell for $50 each. A) What would be the break-even point if Rachel's Racquets only sold tennis racquets? (In units and sales dollars) B) Create a contribution income statement for a month in which Rachel's Racquets sold 2,500 racquetball racquets, and 3,000 tennis racquets. C) Explain, in your own words, how the changes to fixed and variable costs for the tennis racquets impact profitability.