Question

Profit Planning 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 $ 21.00
Direct materials 25.50
Variable overhead 10.50
Total variable costs $ 57.00

Fixed costs
Manufacturing $ 86,000
Selling 50,000
Administrative 412,000
Total fixed costs $548,000
Selling price per unit $ 105
Expected sales (units) 42,000
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? (Round your answer up to the nearest whole
number.)
3. Jan has set the sales target for 46,100 ice cream makers, which she thinks she can achieve by an additional fixed selling expense of $235,640 for advertising. All other costs remain as per the data in the
above table. What will be the operating profit if the additional $235,640 is spent on advertising and
sales rise to 46,100units?
4.a. What will be the new breakeven point if the additional $235,640 is spent on advertising?

4 b Prepare a contribution income statement to support your answer.

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

5. If the additional $235,640 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 42,000 units?

Jan has set the sales target for 46,100 ice cream makers, which she thinks she can achieve by an additional fixed selling expense of $235,640 for advertising. All other costs remain as per the data in the above table. What will be the operating profit if the additional $235,640 is spent on advertising and sales rise to 46,100 units?

Answer 1

Question 1

Operating Income = Contribution Margin - Total Fixed Costs

Contribution Margin = Contribution Margin per Unit * Number of Units Sold

Contribution Margin per Unit = Sales Price per Unit - Variable Costs per Unit

Sales Price per Unit = $ 105

Variable Costs per Unit = $ 57

Contribution Margin per Unit = 105 - 57

Contribution Margin per Unit = $ 48

Contribution Margin = 42,000 Units * $ 48 per Unit = $ 20,16,000

Total Fixed Costs = $ 548,000

Operating Income = 20,16,000 - 548,000

Operating Income = $ 14,68,000

Question 2

Break Even Point in Units = Total Fixed Costs / Contribution Margin per Unit

Contribution Margin per Unit = $ 48

Total Fixed Costs = $ 548,000

Break Even Point in Units = 548,000 / 48

Break Even Point in Units = 11,417 Units

Question 3

Calculation of Operating Income on Sale of 46,100 Units

Contribution Margin = Contribution Margin per Unit * 46,100 Units

Operating Income = 48 * 46,100

Operating Income = $ 22,12,800

Fixed Costs = 548,000 + Additional Advertising Costs

Fixed Costs = 548,000 + 235,640

Fixed Costs = $ 783,640

Operating Income = Contribution Margin - Fixed Costs

Operating Income = 22,12,800 - 783,640

Operating Income = $ 14,29,160

Question 4

Part 4A

Break Even Point in Units after incurrence of Additional Advertising Costs = Fixed Costs / Contribution Margin per Unit

Fixed Costs = $ 783,640

Contribution Margin per Unit = $ 48

Break Even Point in Units = 783,640 / 48

Break Even Point in Units = 16,326 Units

Part 4B

Contribution Margin Income Statement at Break Even Point

Particulars	Amount
Sales Revenue	17,14,230
Less: Variable Costs	9,30,582
Contribution Margin	7,83,648
Less : Fixed Costs	7,83,64
Operating Income	8

Operating Income of $ 8 is due to rounding off sales in Units as it was in fraction.

Sales Revenue = 16,326 Units * $ 105 per Unit = $ 17,14,230

Variable Costs = 16,326 Units * $ 57 per Unit = $ 930,582

Part 4C

Change in Fixed Costs = Fixed Costs after Advertising Costs - Fixed Costs Before Advertising Costs

= 783,640 - 548,000

= $235,640

Change in Fixed Costs in % = Change in Fixed Costs / Fixed Costs Before Incurring Additional Advertising Costs * 100

= 235,640 / 548,000 * 100

= 43%

Change in Break Even Point = Break Even Point after incurring Additional Advertising Costs - Break Even Point before incurring Additional Advertising Costs

= 16,326 - 11,417

= 4,909 Units

% Change in Break Even Point = Change in Break Even Point / Break Even Point before incurring Additional Advertising Costs * 100

= 4,909 / 11,417 * 100

= 43%

Question 5

Current Operating Income = $ 14,68,000

Operating Income after Incurrence of Additional Advertising Costs is to be same as that of Current Operating Income for which we have to find how nany units are required to be sold

Operating Income after Incurrence of Additional Advertising Costs = Contribution Margin - Fixed Costs

Operating Income after Incurrence of Additional Advertising Costs = $ 14,68,000

Let Number of Units Sold = X

Contribution Margin = Units Sold * Contribution Margin per Unit

Contribution Margin = $ 48X

Fixed Costs = $ 783,640

Using Formula for Calculation of Operating Income

14,68,000 = 48X - 783,640

14,68,000 + 783,640 = 48X

48X = 22,51,640

X = 22,51,640 / 48

X = 46,909 Unit's

Alternatively You can calculate as follows

Units Required to be sold to earn Operating Income of $ 14,68,000 = (14,68,000 + Fixed Costs) / Contribution Margin per Unit

= (14,68,000 + 783,640) / 48

= 22,51,640 / 48

= 46,909 Units

Actual Units to be sold is 46,909.17 Units but it has been rounded off as 46,909 so please carefully check this out.