Question

Connelly Inc., a manufacturer of quality electric ice cream makers, has experienced a steady growth in sales over the past few years. Because her business has grown, Jan DeJaney, the president, believes she needs an aggressive advertising campaign next year to maintain the company’s growth. To prepare for the growth, the accountant prepared the following data for the current year:

Variable costs per ice cream maker
Direct labor	$	13.50
Direct materials		14.50
Variable overhead		6.00
Total variable costs	$	34.00
Fixed costs
Manufacturing	$	82,500
Selling		42,000
Administrative		356,000
Total fixed costs	$	480,500
Selling price per unit	$	67.00
Expected sales (units)		30,000

Required:

1. If the costs and sales price remain the same, what is the projected operating profit for the coming year?

Projected Operating Profit:

2. What is the breakeven point in units for the coming year?

Breakeven Point (units):

3. Jan has set the sales target for 35,000 ice cream makers, which she thinks she can achieve by an additional fixed selling expense of $200,000 for advertising. All other costs remain as per the data in the above table. What will be the operating profit if the additional $200,000 is spent on advertising and sales rise to 35,000 units?

Operating Profit:

4-a. What will be the new breakeven point if the additional $200,000 is spent on advertising?

New Breakeven Point (units):

4-b. Prepare a contribution income statement at the new breakeven point.

4-c. What is the percentage change in both fixed costs and in the breakeven point?

Percentage Change in Fixed Costs:

Percentage Change in Breakeven Point:

5. If the additional $200,000 is spent for advertising in the next year, what is the sales level (in units) needed to equal the current year’s operating profit at 30,000 units?

Sales Level (units):

Answer 1