Question

Eagle Company makes the MusicFinder, a sophisticated satellite radio. Eagle has experienced a steady growth in sales for the past five years. However, Ms. Luray, Eagle's CEO, believes that to maintain the company's present growth will require an aggressive advertising campaign next year. To prepare for the campaign, the company's accountant, Mr. Bednarik, has prepared and presented to Ms. Luray the following data for the current year, year 1: Variable costs: Direct labor (per unit) $ 100 Direct materials (per unit) 37 Variable overhead (per unit) 19 Total variable costs (per unit) $ 156 Fixed costs (annual): Manufacturing $ 388,000 Selling 286,000 Administrative 792,000 Total fixed costs (annual) $ 1,466,000 Selling price (per unit) 403 Expected sales revenues, year 1 (27,000 units) $ 10,881,000 Eagle has an income tax rate of 30 percent. Ms. Luray has set the sales target for year 2 at a level of $12,090,000 (or 30,000 radios). Required: a. What is the projected after-tax operating profit for year 1? b. What is the break-even point in units for year 1? (Round up your answer to the nearest whole number.) c. Ms. Luray believes that to attain the sales target (30,000 radios) will require additional selling expenses of $294,000 for advertising in year 2, with all other costs remaining constant. What will be the after-tax operating profit for year 2 if the firm spends the additional $294,000? d. What will be the break-even point in sales dollars for year 2 if the firm spends the additional $294,000 for advertising? (Solve by computing volume in units first. Round up units to the nearest whole number and round your final answer to the nearest whole dollar amount.) e. If the firm spends the additional $294,000 for advertising in year 2, what is the sales level in dollars required to equal the year 1 after-tax operating profit? (Solve by computing volume in units first. Round up units to the nearest whole number and round your final answer to the nearest whole dollar amount.) f. At a sales level of 30,000 units, what is the maximum amount the firm can spend on advertising to earn an after-tax operating profit of $758,000? (Round intermediate calculations and final answer to the nearest whole dollar amount.)

Answer 1

a. What is the projected after-tax operating profit for year 1?

Units

Rate

Amount

sales revenue

27000

$ 403.00

$        10,881,000

Variable cost

27000

$ 156.00

4,212,000

Contribution Margin

27000

$ 247.00

6,669,000

Fixed Cost

1,466,000

Operating Profit

5,203,000

Less: tax at 30%

1,560,900

After tax op. Profit

$          3,642,100

b. What is the break-even point in units for year 1? (Round up your answer to the nearest whole number.)

BEP in units =

Fixed Cost/ Contribution margin pu

1466000/247

5,935

Units

c. Ms. Luray believes that to attain the sales target (30,000 radios) will require additional selling expenses of $294,000 for advertising in year 2, with all other costs remaining constant. What will be the after-tax operating profit for year 2 if the firm spends the additional $294,000?

Units

Rate

Amount

Contribution margin

30000

$ 247.00

$          7,410,000

Less: Fixed cost

1,760,000

(1466000+294000)

Operating Profit

5,650,000

Less: tax at 30%

1,695,000

After tax op. Profit

$          3,955,000

d. What will be the break-even point in sales dollars for year 2 if the firm spends the additional $294,000 for advertising? (Solve by computing volume in units first. Round up units to the nearest whole number and round your final answer to the nearest whole dollar amount.)

BEP in units =

Fixed Cost/ Contribution margin pu

1760000/247

7,126

Units

BEP in $ =

7126 x $403

$          2,871,778

e. If the firm spends the additional $294,000 for advertising in year 2, what is the sales level in dollars required to equal the year 1 after-tax operating profit? (Solve by computing volume in units first. Round up units to the nearest whole number and round your final answer to the nearest whole dollar amount.)

BEP in units with profit =

FC + Profit / Contribution margin pu

(1760000+5203000)/247

28,190

Units

BEP in $ with profit =

28190 x 403

$        11,360,570

f. At a sales level of 30,000 units, what is the maximum amount the firm can spend on advertising to earn an after-tax operating profit of $758,000? (Round intermediate calculations and final answer to the nearest whole dollar amount.)

Operating profit before tax

$          1,082,857

(758000/70%)

Contribution margin

$          7,410,000

Less: fixed cost old

1466000

OP profit before advert.

$          5,944,000

Op. profit after advert.

$          1,082,857

Maximum amount of advert

$          4,861,143

Ans

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