Vanhorn Company

Assessing simultaneous changes in CVP relationships

Vanhorn Company sells tennis racquets; variable costs for each are $75, and each is sold for $105.

Vanhorn incurs $270,000 of fixed operating expenses annually.

Required

a. Determine the sales volume in units and dollars required to attain a $120,000 profit. Verify your answer by preparing an income statement using the contribution margin format.

b. Vanhorn is considering establishing a quality improvement program that 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 $60,000 for advertising. Assuming that the improvement program will increase sales to a level that is 5,000 units above the amount computed in Requirement a, should Vanhorn proceed with plans to improve product quality? Support your answer by preparing a budgeted income statement.

c. Determine the new break-even point and the margin of safety percentage, assuming Vanhorn adopts the quality improvement program.

d. Prepare a break-even graph using the cost and price assumptions outlined in Requirement b.