| Baby Dolls | Teddy Bears | Toy Cars |
| Volume | 200,000 | 125,000 | 225,000 |
Sales Prices | $3.50 | $2.75 | $3.15 |
| Variable Costs | $2.05 | $1.75 | $2.45 |
| Fixed Costs | $65,000 | $125,000 | $35,000 |
Target pretax income= $0
Investment= $2 million
Capacity=1 million units
1. Assume that the volume of dolls sold increases to 225,000units, with no change in fixed or variable costs. What is the newpretax income? Does the number produced by your financial modelappear to be reasonable? (Manually estimate the increase in pretaxincome if volume increases and fixed costs remain constant.)
2. Based on the original assumptions, what is the effect onpretax income if variable costs increase by 5% for each of thethree product lines?Assume that nothing else changes.
3. Return to the original assumptions. Assume that a salesmanager proposed a new advertising campaign to boost sales volume.The campaign would cost $30,000 and is estimated to increase thevolume 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 wereadopted?
4.Return to the original assumptions. Now assume that, due tocompetition, Toddler Toys must cut prices on each of its threeproducts by 20%. In addition, a new advertising campaign costing$45,000 must be instituted to counteract bad publicity. Given theseassumptions, what is the new breakeven point?
5.Return to the original assumptions. What would be the pretaxincome if Toddler Toys increased the price of all three products by10% and the volume of each product line decreased by 5%?
6.Given the same assumptions as in Part 5, how many units mustToddler Toys sell to earn a target pretax income of $100,000? atarget pretax income of $150,000? a pretax return on investment(ROI) of 10%?(Hint: To determine the target pretax income,multiply 10% by the amount invested.)
