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	$	16.00
Direct materials		19.00
Variable overhead		8.00
Total variable costs	$	43.00
Fixed costs
Manufacturing	$	130,500
Selling		46,000
Administrative		550,000
Total fixed costs	$	726,500
Selling price per unit	$	80
Expected sales (units)		57,500

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 62,100 ice cream makers, which she thinks she can achieve by an additional fixed selling expense of $247,010 for advertising. All other costs remain as per the data in the above table. What will be the operating profit if the additional $247,010 is spent on advertising and sales rise to 62,100 units?

4-a. What will be the new breakeven point if the additional $247,010 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 $247,010 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 57,500 units?

ALSO:

Lionel Corporation manufactures pharmaceutical products sold through a network of sales agents in the United States and Canada. The agents are currently paid an 18% commission on sales; that percentage was used when Lionel prepared the following budgeted income statement for the fiscal year ending June 30, 2019:

Lionel Corporation
Budgeted Income Statement
For the Year Ending June 30, 2019
($000 omitted)
Sales				$	30,200
Cost of goods sold
Variable	$	13,590
Fixed		3,624			17,214
Gross profit				$	12,986
Selling and administrative costs
Commissions	$	5,436
Fixed advertising cost		906
Fixed administrative cost		2,416			8,758
Operating income				$	4,228
Fixed interest cost					755
Income before income taxes				$	3,473
Income taxes (30%)					1,042
Net income				$	2,431

Since the completion of the income statement, Lionel has learned that its sales agents are requiring a 5% increase in their commission rate (to 23%) for the upcoming year. As a result, Lionel’s president has decided to investigate the possibility of hiring its own sales staff in place of the network of sales agents and has asked Alan Chen, Lionel’s controller, to gather information on the costs associated with this change.

Alan estimates that Lionel must hire eight salespeople to cover the current market area, at an average annual payroll cost for each employee of $80,000, including fringe benefits expense. Travel and entertainment expenses is expected to total $770,000 for the year, and the annual cost of hiring a sales manager and sales secretary will be $235,000. In addition to their salaries, the eight salespeople will each earn commissions at the rate of 10% of sales. The president believes that Lionel also should increase its advertising budget by $670,000 if the eight salespeople are hired.

Required

1. Determine Lionel’s breakeven point (operating profit = 0) in sales dollars for the fiscal year ending June 30, 2019, if the company hires its own sales force and increases its advertising costs. Prove this by constructing a contribution income statement.

2. If Lionel continues to sell through its network of sales agents and pays the higher commission rate, determine the estimated volume in sales dollars that would be required to generate the operating profit as projected in the budgeted income statement.

Answer 1

ITS NOT DESIRED PROFIT , ACTUALLY IT IS UNITS TO EARN DESIRED PROFIT

SECOND SCENARIO