Question

Company ehf. which produces high quality headphones has been in the marketing campaign for the past six years. To meet ever-increasing competition in this market, the CEO of Company ehf. that an ad campaign is needed next year to maintain the company's market share. At his request, the operating accountant has compiled the accompanying figures from the cost accounting for 2012 in order to prepare the marketing plan for next year, ie. 2013.

It is requested:

a) What will be the estimated operating income this year, ie.

B) What is the contribution margin per unit of contribution this year?

C) What is the break-even point in units this year?

D) The CEO believes that in order to achieve sales targets next year, ISK 1 million needs to be set. more advertising than this year, but other costs will remain unchanged. What then does the sales revenue need to be in 2013 in order for the business to be in balance (to break-even)?

E) What does the sales revenue need to be in 2013, e.g. this ISK 1 million advertising campaign, to have the same operating profits as expected this year?

Budget plan	KR.
Variable costs:
Direct materials	800
Direct salary	400
Instant costs	300
Variable costs. per headset	1.500
Permanent cost
Product cost	2.500.000
Cost of sales	4.000.000
Management cost	7.000.000
Permanent cost total	13.500.000
Price per head	2.500
Estimated sales revenue 2012 (20,000 pcs)	50.000.000

Answer 1

a)		Units	Per Unit	Total
	Estimated Sales	20,000	2,500	50,000,000
	Less: Cost
	Variable Cost	20,000	1,500	30,000,000
	Permanent Cost			13,500,000
	Total Cost			43,500,000
	Estimated Operating Income			6,500,000
b)				Per Unit
	Estimated Sales per Unit			2,500
	Less: Variable Cost per Unit			1,500
	Contribution Margin per unit			1,000
c)	Break Even Point
	Break Even Point = Total Permanent cost per Unit / Contribution per Unit
	Permanent Cost		i	13,500,000
	Contribution Margin Per Unit		ii	1,000
	Break Even Point=		i/ii	13,500	Units
d)	Existing Estimated Permanent cost			13,500,000
	Add: Additional Advertising cost			1,000,000
	Total Permanent Cost - Revised			14,500,000
	Contribution Margin Per Unit		ii	1,000
	Break Even Point=		i/ii	14,500	Units
	Break Even Point (Revenue)=		i/ii	36,250,000	Sale value per unit (2,500)* break even point units
e)	Existing Operating Profit as calculated above			6,500,000
	Add: Revised total permanent cost (including advertising cost)			14,500,000
	Total Contribution needed		i	21,000,000
	Contribution Margin Per Unit		ii	1,000
	No. of Units to achieve contribution		i/ii	21,000	Units
	Revenue amount			52,500,000	Sale value per unit (2,500)* no of units