Solved: Aqua Gear in business since 2008 makes

swimwear for profession

Aqua Gear in business since 2008 makes swimwear for profession

Aqua Gear, in business since 2008, makes swimwear for professional athletes. Analysis of the
firm’s financial records for the current year reveals the following:
Average swimsuit selling price ..... $70
Variable swimsuit expenses
Direct material ........... 28
Direct labor ............. 12
Variable overhead ........... 8
Annual fixed cost
Selling ............. $10,000
Administrative ........... 24,000
The company’s tax rate is 40 percent. Samantha Waters, company president, has asked you to
help her answer the following questions.
a. What is the break-even point in number of swimsuits and in dollars?
b. How much revenue must be generated to produce $40,000 of pre-tax earnings? How many
swimsuits would this level of revenue represent?
c. How much revenue must be generated to produce $40,000 of after-tax earnings? How many
swimsuits would this represent?
d. What amount of revenue would be necessary to yield an after-tax profit equal to 20 percent of
revenue?
e. Aqua Gear is considering purchasing a faster sewing machine that will save $6 per swimsuit
in cost but will raise annual fixed cost by $40,000. If the equipment is purchased, the company
expects to make and sell an additional 5,000 swimsuits. Should the company make this
investment?
f. A marketing consultant told Aqua Gear managers that they could increase the number of
swimsuits sold by 30 percent if the selling price was reduced by 10 percent and the company
spent $10,000 on advertising. The company has been selling 3,000 swimsuits. Should the
company make the changes advised by the consultant?

Aqua Gear in business since 2008 makes swimwear for profession

ANSWER
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