Tess\'s Test Prep services school districts that wish to assess students\' readi

Question

Tess's Test Prep services school districts that wish to assess students' reading and mathematical abilities. Last year Tess evaluated 60,000 math tests and 20,000 reading tests. An income statement for the year follows. 1. Math Testing Reading Testing Total Total Per Unit Total Per UnitCompany $720,000 $36 360,000 18 $360,000 $18 $1,920,000 1.200,000 720,000 60,000 360,000 $1,200,000 $20 Sales Revenue Variable Expenses Contribution Margin Fixed Expenses Operating Income 840,000 14 360,000 6 Required a. What is Tess's breakeven point in sales dollars? b. In an effort to raise the demand for reading tests, managers are planning to lower the price from $36 per test to $20 per test, the current price of the math test. They believe that doing so will increase the demand for reading tests to 60,000. Prepare a contribution format income statement reflecting Tess's new pricing and demand structure. What will be Tess's breakeven point in sales dollars if this change is implemented? Do you recommend that Tess make the change? c.

Explanation / Answer

Answer a. BEP (In $) = Fixed Cost / Contribution Margin Ratio Contribution Ratio = $720,000 (Contribution) / $1,920,000 (Sales) Contribution Ratio = 37.50% BEP (In $) = $360,000 / 37.50% BEP (In $) = $960,000 Answer b. Contribution Format Income Statement Math Testing Reading Testing Total Company Total   Per Unit Total   Per Unit Sales Revenue    1,200,000.00         20.00    1,200,000.00         20.00    2,400,000.00 Variable Expenses        840,000.00         14.00    1,080,000.00         18.00    1,920,000.00 Contribution Margin        360,000.00           6.00        120,000.00           2.00        480,000.00 Fixed Expenses        360,000.00 Operating Income        120,000.00 Answer c. BEP (In $) = Fixed Cost / Contribution Margin Ratio Contribution Ratio = $480,000 (Contribution) / $2,400,000 (Sales) Contribution Ratio = 20% BEP (In $) = $360,000 / 20% BEP (In $) = $1,800,000 No, the conpany should not make the change.

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