Question

	Baby dolls	teddy bears	toy cars
volume units	200,000	125,000	225,000
price per unit	$3.50	$2.75	$3.15
variable cost per unit	$2.05	$1.75	$2.45
Fixed costs total	$225,000
desired after-tax profit	0
income tax rate	30%

Target pretax income=0

Investment=$2 million

Capacity=1 million units

1.Create a spreadsheet that the managers can use for sensitivity analysis. Modify input data in the spreadsheet to answer the following parts of this problem. You might want to add cell references for percentage changes in prices, volumes, and costs.

2.Assume that the volume of dolls sold increases to 225,000 units, with no change in fixed or variable costs. What is the new pretax income? Does the number produced by your financial model appear to be reasonable? (Manually estimate the increase in pretax income if volume increases and fixed costs remain constant. Compare this figure to your spreadsheet result.)

3.Based on the original assumptions, what is the effect on pretax income of variable costs increase by 5 percent for each of the three product lines? Assume that nothing else changes.

4.Return to the original assumptions. Assume that a sales manager proposed a new advertising campaign to boost sales volume. The campaign would cost $30,000 and is estimated to increase the volume of each product as follows:

Baby doll sales increase by 20,000 units. Teddy bear sales increase by 7,500 units. Toy car sales increase by 30,000 units.

What would be the effect on pretax income if this plan were adopted?

5.Return to the original assumptions. Now assume that, due to competition, Toddler Toys must cut prices on each of its three products by 20 percent. In addition, a new advertising campaign costing $45,000 must be instituted to counteract bad publicity. Given these assumptions, what is the new breakeven point?

6.Return to the original assumptions. What would be the pretax income if Toddler Toys increased the price of all three products by 10 percent and the volume of each product line decreased by 5 percent?

7. Given the same assumptions as in part 6, how many units must toddler toys sell to earn a target pretax income of $100,000? a target pretax income of $150,000? a pretax return on investment (ROI) of 10 percent? (Hint: to determine the target pretax income, multiply 10 percent by the amount invested.)

Answer 1

PreTax profit in first 4 scenerio is calculated, Pre tax profit is Sales-Variable Cost- Fixed Cost.