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	$	14.00
Direct materials		17.00
Variable overhead		7.00
Total variable costs	$	38.00
Fixed costs
Manufacturing	$	117,000
Selling		57,000
Administrative		466,000
Total fixed costs	$	640,000
Selling price per unit	$	70
Expected sales (units)		78,500

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 82,700 ice cream makers, which she thinks she can achieve by an additional fixed selling expense of $211,200 for advertising. All other costs remain as per the data in the above table. What will be the operating profit if the additional $211,200 is spent on advertising and sales rise to 82,700 units?

4-a. What will be the new breakeven point if the additional $211,200 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 $211,200 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 78,500 units?

Answer 1

1.

Sales (70*78,500)	5,495,000
Less: variable costs (38*78,500)	2,983,000
Contribution	2,512,000
Less: fixed costs	640,000
Operating profit	1872,000

2.

Let the breakeven unit be x

Sales = Fixed cost + variable cost

Or, 70x = 640,000 + 38x

Or. X = 20,000 units

3.

Sales (70*82,700)	5,789,000
Less: variable costs (38*82,700)	3,142,600
Contribution	2,646,400
Less: fixed costs	640,000
Advertising	211,200
Operating profit	1795,200

4.a.

Let the breakeven unit be x

Sales = Fixed cost + variable cost

Or. 70x = (640,000 + 211,200) + 38x

Or. X = 26,600 units

b.

Contribution income statement as required

Sales (70*82,700)	5,789,000
Less: variable costs (38*82,700)	3,142,600
Contribution	2,646,400
Less: fixed costs	640,000
Advertising	211,200
Operating profit	1,795,200

c.

Percentage change in fixed costs = 211,200/640,000 = 33%

Percentage change in breakeven point = (26,600-20,000)/20000 = 33%

5.

Let the quantity be x

Sales = variable cost + fixed cost + operating profit

Or, 70x = 38x + (640,000 + 211,200) + 1872,000

Or. X = 85,100 units

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