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Due to the sluggish economy, the Constellation Company has experienced some difficulty in selling its deluxe microwave ovens.

The following data relate to the current year:

Sales (9,000 units @ $100/unit) $ 900,000

Less variable costs (9,000 @ $60/unit) 540,000 Contribution margin $ 360,000 Less fixed costs 400,000 Net operating loss $ (40,000 )

Required:

1. Compute Constellation's annual breakeven point, in both units and dollars. Also, compute the contribution margin ratio.

2. The manager believes that a $40,000 increase in advertising would result in a $120,000 increase in annual sales. If the manager is right, what will be the net effect on the company's operating income?

3. Refer to the original data. The vice-president in charge of sales is certain that a 10% reduction in selling price in combination with a $30,000 increase in advertising will cause sales volume to increases by 50%. What effect would this strategy have on operating income of the company?

4. Refer to the original data. In the following year, Constellation saved $5 of total variable costs per oven by buying parts from a different manufacturer. However, Constellation's rent and insurance increased by $5,600. The store sold 11,000 bikes. What was its operating income for the year?

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