Question

The following data is used for questions 1-5. Martin, Inc., is a manufacturer of quality headphones. The President believes she needs an aggressive advertising campaign next year to maintain the company’s growing profitability. The accountant for the company has prepared the following information for the current year:

Selling price per headphone $70.00

Variable costs per headphone: Direct labor $15.00 Direct materials 14.00 Variable overhead 6.00 Total variable costs $35.00

Fixed Costs: Manufacturing $90,000 Selling 44,000 Administrative 356,000 Total fixed costs $490,000

Expected sales (units) this year 25,000 headphones

For questions 1 – 5, use the above information. Select the closest answer. For each of these questions refer back to the original data

1. If the costs and sales price remain the same, what is the projected operating income for the coming year?

A. $ 385,000 B. $ 415,000 C. $ 354,000 D. $ 515,000 E. $ 409,000

2. What is the break-even point in sales dollars for the coming year?

A. $ 785,000 B. $ 1,030,000 C. $ 980,000 D. $ 895,000 E. $ 1,225,000

3. Jan has set the sales target for 35,000 headphones which she thinks she can achieve by an additional fixed selling expense of $400,000 for advertising. All other costs and the selling price remain the same. What will be the operating income if the additional $400,000 is spent on advertising?

A. $ 415,000 B. $ 335,000 C. $ 224,500 D. $ 275,000 E. $ 446,000

4. What will be the new breakeven point if an additional $400,000 is spent for advertising and the Sales price goes up to $75 per set of headphones? All other costs remain the same.

A. 22,250 units B. 15,960 units’ C. 18,750 units D. 20,960 units E. 25,500 units

5. If an additional $400,000 is spent for advertising in the next year and the sales price goes up to $75 per set of headphones, what is the required sales level in units to equal the current year’s operating income at 25,000 units calculated in requirement 1? Other costs will remain the same.

A. 26,545 units B. 40,945 units C. 36,542 units D. 31,875 units E. 29,859 units

Answer 1

Selling price per unit			70
Less: variable cost per unit			35
Contribution margin per unit			35
CM ratio = 35/70 *100 =50%
Q1.
Answer is A. $ 385000
Explanation:
Total contribution (25000*35)			875,000
Less: Fixed cost			490,000
Net operating income			385,000
Q2.
Answer is C. 980000
Explanation:
Break even in $: Fixed cost/ CM ratio
		490000 /50% = 980000
Q3.
Answer is B. 335000
Explanation:
Contribution (35*35000)			1225000
Less: Fixed cost			490000
Less: Additional addvertisement			400000
Net Income			335000
Q4.
Answer is A. 22250 units
Explanation:
Revised CM per unit = 75-35 = 40
Fixed cost:490000+400000 = 890000
Break even units= 890000 /40 = 22250 units
Q5.
Answer is D. 31875 unitd
Explanation:
Required sales units= 890000+385000 /40 = 31875 units