Question

please use word document

Q3

Tanner Company's most recent contribution format income statement is presented below:

Sales                                        $75,000

Less: Variable Expenses         $45,000

Contribution Margin               $30,000

Less: Fixed Expenses             $36,000

Operating Loss                       $(6,000)

The company sells its only product for $15 per unit. There were no beginning or ending inventories.

Required:

a) Compute the company's break-even point in units sold.
b) Compute the total variable expenses at the break-even point.
c) How many units would have to be sold to earn a target operating income of $9,000?
d) The sales manager is convinced that a $6,000 increase in the advertising budget would increase total sales by $25,000. Would you advise the increased advertising outlay?

Answer 1

(a) Sales = 75000(Given)

sales in units=75000/15=5000 units

variable cost per unit=45000/5000 units=$9/unit

We know that Breakeven point in unit sold=Fixed cost / (Sales price per unit- variable cost per unit)

= $36,000/($15-$9) .i.e.

Hence, breakeven point in unit sold is 6,000 Units

(b) Total Variable expenses at the breakeven point= Breakeven point in units sold x Variable cost per unit

= 6000 units x $9

= $54,000

(c) Target units sold to achieve $9,000 profit = (Fixet cost + target profit) / ( Sales price per unit- variable cost per unit)

= ($36,000+$9,000)/($15-$9)

= $45,000/$6 .i.e 7500 units

(d) After advertising expenses:

Incremental Sales=25000

Incremental Variable cost=(25000/15)*9 = $15,000

Advertising expenses=6000

Incremental profit= 25,000-15000-6000=$4,000

Since we are earning incremental profit of $4,000, the proposal for increased advertising outlay may be accepted. It is pertinent to mention that fixed cost is not considered in this calculation as it is likely to remian same and will not affect incremental profits or losses.