Reference no: EM132562225

Baker Optical Shop has been in operation for several years. Analysis of the firm's recent financial statements and records reveal the following:

Average Selling price per pair of glasses $70

Variable expenses per pair:

Lenses and frames $28

Sales commission 12

Variable overhead 8

Annual fixed costs:

Selling expenses $18,000

Administrative expenses 48,000

The company's effective tax rate is 40 percent. Sara's Baker, company president, has asked you to help her answer the following questions about the business.

Question a. What is the break-even point in pairs of glasses? In Birr?

Question b. How much revenue must be generated to produce $80,000 of pretax earnings? How many pairs of glasses would this level of revenue represent?

Question c. How much revenue must be generated to produce $80,000 of after-tax earnings? How many pairs of glasses would this represent?

Question d. What amount of revenue would be necessary to yield an after-tax profit equal to 15% of revenue?

Question e. Banker is considering adding a lens-grinding lab, which will save Br. 6 per pair of glasses in lens cost, but will raise annual fixed costs by Br. 8,000. She expects to sell 5,000 pairs of glasses. Should she make this investment?

Question f. A marketing consultant told Baker that she could increase the number of glasses sold by 30 percent if she would lower the selling price by 10 percent and spend Br. 20,000 on advertising. She has been selling 3,000 pairs of glasses. Should she make these two related changes?