Question

Maus and Company maker of quality hand made pipes, has experienced a steady growth in sales for the past five years. However, increased competition has led Michael Maus, the president to believe that an aggressive advertising campaign will be necessary next year to maintain the company’ growth. To prepare for the next year’s advertising campaign, the company accountant has prepared the following data for year 1

Cost Schedule
Variable Cost per pipe
Direct Labor	$8
Direct Material	3.25
Variable Overhead	2.50
Variable Cost per unit	13.75
Fixed Costs
Manufacturing	$25,000
Selling Cost	40,000
Administrative Costs	70,000
Total fixed Costs	135,000
Selling price per pipe	25.00
Expected sales this year (20,000 units)	$500,000

Required

1. Determine the breakeven point for Maus Company
2. Compute the number of units required to achieve a target profit of $100,000
3. Michael believes that an additional expense of 11,250 for advertising in year 2 will all other costs remaining constant will cause sales to increase sales by 5000 units. Do you advice Michael to spend for the advertising campaign   
   

Answer 1

	Selling price per pipe			$   25.00
Less:	Variable Cost per pipe			$   13.75
	Cont. Margin per pipe			$   11.25
1)	Break even point		=	Total Fixed Costs / Cont. Margin per pipe
			=	$ 135000 / $ 11.25
			=	12000	units
2)	No. of units req		=	(Total Fixed Cost + Target Profit)/ Cont. Margin per pipe
			=	($ 135000 + $ 100000) / $ 11.25
			=	20889	units

3)	Particulars		Current Scenario	Michael's Advice
	Contribution		$      225,000.00	$      281,250.00
			($ 11.25 x 20000)	($ 11.25 x 25000)
	Fixed Costs		$      135,000.00	$      146,250.00
	Profit		$         90,000.00	$      135,000.00
	Yes, Michael can spend for the advertisement