Question

The new CEO of Richard Manufacturing has asked for a variety of information about the operations of the firm from last year. The CEO is given the following​ information, but with some data​ missing:

Total sales revenues ?

Number of units produced and sold - 500,000 units

Selling price - ?

Operating income - $220,000

Total investment in assets - $2,750,000

Variable cost per unit - $2.30

Fixed costs for the year - $3,250,000

1.Find​ (a) total sales​ revenue, (b) selling​ price, (c) rate of return on​ investment, and​ (d) mark-up percentage on full cost for this product.

2.The new CEO has a plan to reduce fixed costs by $ 275,000 and variable costs by $ 0.25 per unit while continuing to produce and sell 500,000 units. Using the same mark-up percentage as in requirement​ 1, calculate the new selling price.

3.Assume the CEO institutes the changes in requirement 2 including the new selling price. ​ However, the reduction in variable cost has resulted in lower product quality resulting in 10​% fewer units being sold compared to before the change. Calculate operating income​ (loss).

4.What​ concerns, if​ any, other than the quality problem described in requirement​ 3, do you see in implementing the​ CEO's plan? Explain briefly.

Answer 1

		Ans 1	Ans 2	Ans 3
Units Sold	Nos	5,00,000	5,00,000	4,50,000
Variable cost per unit	$	2.30	2.05	2.05
Total Variable Cost	$	11,50,000	10,25,000	9,22,500
Fixed Cost	$	32,50,000	29,75,000	29,75,000
Total Cost of Production	$	44,00,000	40,00,000	38,97,500
Operating Income /(Loss)	$	2,20,000	2,00,000	-1,17,500
Total Revenue	$	46,20,000	42,00,000	37,80,000
Selling Price Per Unit	$	9.24	8.40	8.40
Cost Price Per Unit	$	8.80	8.00	8.66
Mark up %	%	5.00%	5.00%	-3.01%