High School Traditions operates a shop that makes and sells class rings for local high schools. Operating statistics follow:
Average selling price per ring $250
Variable costs per ring:
Rings and stones $ 90
Sales commissions 18
Variable overhead 8
Annual fixed cost:
Selling expenses $42,000
Administrative expenses 56,000
The company's tax rate is 30 percent.
1. What is the firm's break-even point in rings? In revenue?
2. How much revenue is needed to yield $140,000 before-tax income?
3. How much revenue is needed to yield an after-tax income of $120,000?
4. How much revenue is needed to yield an after-tax income of 20 percent of revenue?
5. The firm's marketing manager believes that by spending an additional $12,000 in advertising and lowering the price by $20 per ring, he can increase the number of rings sold by 25%. He is currently selling 2,200 rings. Should he make these changes? Show proof.
This solution shows step-by-step calculations to determine the break-even point, the required revenue, and the effects of spending more money of advertising and lowering prices. All formulas are shown in an Excel file.