Question

In: Accounting

The data below is estimated for ABC Co.’s next year of operations. Sales $8,000,000 100.00% Variable...

The data below is estimated for ABC Co.’s next year of operations.

Sales $8,000,000 100.00% Variable Costs $3,500,000 43.75% Contribution Margin $4,500,000 56.25% Fixed Costs $3,000,000 Profit $1,500,000

ABC Co. management believes that a $500,000 advertising campaign with Google Analytics will cause sales to increase 30%. Determine the affect on profit and answer questions 12 and 13. If the company buys a new machine for the factory sales will go up an estimated 18% but fixed costs will increase 6%. Determine the affect on profit and answer questions 14.

12. The increase in the contribution margin is: a. $667,000 c. $540,000 b. $881,000 d. None of the above

13. The increase in profit is: a. $960,000 c. $540,000 b. $850,000 d. None of the above

14. The affect on profit for the next year from buying the new machine is: a. $120,000 decrease c. $630,000 increase b. $120,000 increase d. None of the above

Solutions

Expert Solution

The present situation is

Sales

8,000,000

100.00%

Less: Variable cost

3,500,000

43.75%

Contribution margin

4,500,000

56.25%

Less: Fixed cost

3,000,000

Profit

1,500,000

1

Now $500,000 advertising campaign with Google Analytics will cause sales to increase 30%.

12. The increase in the contribution margin

Sales (8,000,000*130%)

10,400,000

100.00%

Less:Variable cost(3,500,000*130%)

4,550,000

43.75%

Contribution margin

5,850,000

56.25%

Less:Fixed cost (3,000,000+500,000)

3,500,000

Profit

2,350,000

12.

The increase in the contribution margin=None of the above

Working

=5,850,000-4,500,000

=1,350,000

So out of given option none of the above option is correct

13. The increase in profit is =b. $850,000

Working

=2,350,000-1,500,000

=850,000

So out of given option $850,000 (b)option is correct

________________________________________________________________________

2

company buys a new machine for the factory sales will go up an estimated 18% but fixed costs will increase 6%..

New

Sales (8,000,000*118%)

9,440,000

Less: Variable cost(3,500,000*118%)

4,130,000

Contribution margin

5,310,000

Less: Fixed cost (3,000,000)*1.06

3,180,000

Profit

2,130,000

. The increase in profit is =b. $630,000

Working

=2,130,000-1,500,000

=630,000

So out of given option $630,000 option is correct


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