PROBLEM 1    

Vanhorn Company sells tennis racquets; variable costs for each are $75, and each is sold for $105. Vanhorn incurs $ 270,000 of fixed operating expenses annually.  

1. Determine the sales volume in units and dollars required to attain a $ 120,000 profit. Verify your answer by preparing the income statement using the contribution margin format  

2. Vanhorn is considering establishing a quality improvement process that will require a $ 10 increase in the variable cost per unit. To inform its customers of the quality improvements, the company plan to spend an additional $ 60,000 for advertising. Assuming that the improvement programme will increase sales to a level that is 5,000 above the amount computed in question 1, should Vanhorn proceeds with plans to improve product quality? Support your answer by preparing a budgeted income statement   

3. Determine the new break-even point (units and $ sales) assuming Vanhorn adopts the quality improvement programme  

4. At the end of the year, the actual results are : a. Units sales are 15,000, with a selling price per unit of $ 104  b. The variable costs per unit are $ 72 and the fixed operating expenses amount to $ 270,000 

Prepare the actual income statement and compare it to the one prepared in question 1. Compute the sales variance and its components, the profit variance and its components.