Question

J.T.Pan and​ Company, a manufacturer of quality handmade walnut​ bowls, has had a steady growth in sales for the past 5 years.​ However, increased competition has led Mr.Pan​, the​ president, to believe that an aggressive marketing campaign will be necessary next year to maintain the​ company's present growth. To prepare for next​ year's marketing​ campaign, the​ company's controller has prepared and presented Mr.Pan with the following data for the current​ year, 2017​:

Variable cost (per bowl)
	Direct materials		$3.00
	Direct manufacturing labor		8.00
	Variable overhead (manufacturing, marketing, distribution and customer service)		2.60
		Total variable cost per bowl	$13.60
Fixed costs
	Manufacturing		$15,000
	Marketing, distribution, and customer service		270,600
		Total fixed costs	$285,600
Selling price			$34.00
Expected sales, 21,000 units			$714,000
Income tax rate			40%

Requirements:

1.	What is the projected net income for 2017​?
2.	What is the breakeven point in units for 2017​?
3.	Mr. Pan has set the revenue target for 2018 at a level of $816,000 ​(or 24,000bowls). He believes an additional marketing cost of $12,240 for advertising in 2018​, with all other costs remaining​ constant, will be necessary to attain the revenue target. What is the net income for 2018 if the additional $12,240 is spent and the revenue target is​ met?
4.	What is the breakeven point in revenues for 2018 if the additional $12,240 is spent for​ advertising?
5.	If the additional $12,240 is​ spent, what are the required 2018 revenues for 2018 net income to equal 2017 net​ income?
6.	At a sales level of 24,000 units, what maximum amount can be spent on advertising if a 2018 net income of $114,006 is​ desired?

Answer 1

J.T.Pan and​ Company

INCOME STATEMENT

For the year ended 2017

Particulars	Per unit cost	Total cost
Sales ($34*21000units)	$34	$714,000
Less: Variable costs	$(13.60)	$(285600)
Contribution margin	$20.40	$428,400
Less: Total fixed costs		(285600)
Net profit before tax		$142,800
Less: Income tax (142800*40%)		(57120)
Net Income		$85,680

1) Projected net income for 2017 is $85,680

2) Computation of Break-even point :

Break-even point (in units)= Fixed costs / Contribution per unit

=285600 / $20.40

=14000units

Break-even point (in units)=14000units

3)

Contribution margin = Number of units sold * Contribution per unit

= 24000 * $20.40

Contribution margin = $489,600

Contribution margin	$489,600
less: Fixed costs (285600+12,240)	(297840)
Net income before tax	$191,760
Less: Income tax	(76704)
Net income for 2018	$115056

4)Break-even point = Fixed costs / Contribution per unit

=297840 / $20.40

= 14600 units

Break even revenue in 2018 = 14600 units * selling price

= 14600 * $34

= $496,400

Break even revenue in 2018 = $496,400

5) Requires Net income = $85,680

Let Number of units sold = X

Net income =( Contribution per unit * X - Fixed cost ) (1-0.40)

=[( $20.40 * X) - 297840 ] 0.60

85,680= 12.24 X - 178704

264,384 = 12.24 X

X = 21600 units

Number of units to be sold = 21600units

Sales Revenue = 21600units * $34

=$734,400

Sales Revenue = $734,400

6) Required net income after tax = 114,006

Required net income before tax = 114006 * (100/100-40)

= 190010

Sales (in units) = (Fixed cost + Required Net income ) / Contribution per unit

24000 = (Fixed cost + 190010 ) / 20.40

$489,600 = Fixed cost + 190010

Fixed cost = 489600 -190010

=$299590

Excess of fixed cost over already existing total fixed cost of $285,600 will account for excess advertising costs

Advertising cost =$299590 -  $285,600

= $13,990

Maximum amount that can be spent on advertising is $13,990