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Question

Aqua Gear, is in business since 2017, makes swimwear for professional

athletes. Analysis of the firm's financial records for the current year reveals the following:


Average swimsuit selling price is Rs. 70 and variable swimsuit expenses are direct material Rs. 28 , direct labor Rs. 12 and
variable overhead Rs. 8 per unit.
Annual fixed cost selling Rs. 10,000 and administrative Rs. 24,000


The company's tax rate is 40 percent. The President of the company has asked you to help him to answer the following questions


a. What is the break-even point in number of swimsuits and in Rupees?
b. How many revenue must be generated to produce Rs. 40,000 of pre-tax earnings? How many swimsuits would this level of revenue represent?
c. How much revenue must be generated to produce Rs. 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 18 percent of revenue?
e. Aqua Gear is considering purchasing a faster sewing machine that will save Rs. 6 per swimsuit in cost but will raise annual fixed cost by Rs. 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 Rs. 10,000 on advertising. The company has been selling 3,000 swimsuits. Should the company make the changes advised by the consultant?

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