Question

Product Trail Runner Roadrunner ....$90 $75 60 50 130,000 $%50,000

CVP Analysis of Alternative Products Pegasus Shoe Company plans to expand its manufacturing capacity to allow up to 20,000 pairs of a new product each year. Because only one product can be produced, management is deciding between the production of the Roadrunner for backpacking and the Trail Runner for exercising. A marketing analysis indicates Pegasus could sell between 8,000 and 14,000 pairs of either product. The accounting department has developed the following price and cost information: Facility costs for expansion, regardless of product, are $150,000. Pegasus is subject to a 40 percent income tax rate.

Required

a. Determine the number of pairs of Roadrunner shoes Pegasus must sell to obtain an after-tax profit of $30,000.

b. Determine the number of pairs of each product Pegasus must sell to obtain identical before-tax profit.

c. For the solution to requirement b, calculate Pegasus’ after-tax profit or loss.

d. Which product should Pegasus produce if both products were guaranteed to sell at least 13,000 pairs? Verify your solution with calculations.

e. How much would the variable costs per pair of the product not selected in requirement d have to fall before both products provide the same profit at sales of 13,000 pairs? Verify your solution with calculations.

Please use excel spreedsheet with formulas. Thank you! :)

Answer 1

road runner Trail runner
Amount in $ Amount in $
contribution per pair 30 25
product cost 130000 50000
cost of expansion 150000
Income tax - 40%

a) After tax profit 30,000
Profit before tax 50,000
$ 30000/.6
Add cost of expansion 150,000
product cost 130,000
total cost 330,000
Profit per unit 30
Number of pair require for road runner            11,000

b) After tax profit 30000
Profit before tax 50000
$ 30000/.6
cost of expansion 150000
product cost 50000
total cost 250000
Profit per unit 25
Number of pair require for Trail runner 10000

c) Pegasus profit after tax
Roadrunner Trail runner
Quantity 11000 10000
contribution per pair 30 25
contribution per pair 330000 250000
product cost 130000 50000
expansion cost 150000 150000
Profit before tax 50000 50000
Tax 40 % 20000 20000
Profit after tax 30000 30000

D) profit at 13000 pair
Roadrunner Trail runner
Quantity 13000 13000
contribution per pair 30 25
contribution per pair 390000 325000
product cost 130000 50000
expansion cost 150000 150000
Profit before tax 110000 125000
Tax 40 % 44000 50000
Profit after tax 66000 75000
Pegasus should produce Trail runner