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	$	20.00
Direct materials		24.00
Variable overhead		10.00
Total variable costs	$	54.00
Fixed costs
Manufacturing	$	101,000
Selling		48,000
Administrative		366,000
Total fixed costs	$	515,000
Selling price per unit	$	100
Expected sales (units)		50,500

Required:

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

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

3. Jan has set the sales target for 54,400 ice cream makers, which she thinks she can achieve by an additional fixed selling expense of $226,600 for advertising. All other costs remain as per the data in the above table. What will be the operating profit if the additional $226,600 is spent on advertising and sales rise to 54,400 units?

4-a. What will be the new breakeven point if the additional $226,600 is spent on advertising?

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?

5. If the additional $226,600 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 50,500 units?

Answer 1

1	Units Sols	50500
	Price Per Unit	100
	Sales	5050000
	Variable Cost
	Direct Labor	1010000
	Direct Material	1212000
	Variable Overhead	505000
	Total Variable Cost	2727000
	Contribution Margin	2323000
	Fixed Cost
	Manufacturing	101000
	Selling	48000
	Administrative	366000
	Total Fixed Cost	515000
	Operating Profit	1808000

2	Contribition Margin % = Contribution Margin/Sales
	Contribition Margin % = 2323000/5050000
	Contribition Margin %   = 46%
	Total Fixed Cost	515000
	Contribition Margin %	46%
	Breakeven Sales = Total Fixed Cost / Contribution Margin %
	Breakeven Sales = 515000/46%
	Breakeven Sales = 1119565

3	Units Sols	54400
	Price Per Unit	100
	Sales	5440000
	Variable Cost
	Direct Labor	1088000
	Direct Material	1305600
	Variable Overhead	544000
	Total Variable Cost	2937600
	Contribution Margin	2502400
	Fixed Cost
	Manufacturing	101000
	Selling	48000
	Administrative	366000
	Advertising	226600
	Total Fixed Cost	741600
	Operating Profit	1760800

4a	Total Fixed Cost	741600
	Contribition Margin %	46%
	Breakeven Sales = Total Fixed Cost / Contribution Margin %
	Breakeven Sales = 741600/46%
	Breakeven Sales = 1612174
4b	Contrivution Income Statement
	Sales	1612174
	Less : Variable Cost
	Direct Labor	322435
	Direct Material	386922
	Variable Overhead	161217
	Total Variable Cost	870574
	Contribution Margin	741600
	Less : Fixed Cost
	Manufacturing	101000
	Selling	48000
	Administrative	366000
	Advertising	226600
	Total Fixed Cost	741600
	Operating Profit	0
4c		Old	New	Difference	%
	Fixed Cost	515000	741600	226600	0.44
	Breakeven Sales	1119565	1612174	492609	0.44

5
	Operating Profit	1808000
	Add : New Fixed Cost	741600
	Contribution (a)	2549600
	Contribution Margin (b)	46%
	Sales (a)/(b)	5542609
	Units	55426