Question

Eagle Company makes the MusicFinder, a sophisticated satellite radio. Eagle has experienced a steady growth in sales for the past five years. However, Ms. Luray, Eagle's CEO, believes that to maintain the company's present growth will require an aggressive advertising campaign next year. To prepare for the campaign, the company's accountant, Mr. Bednarik, has prepared and presented to Ms. Luray the following data for the current year, year 1:

Variable costs:
Direct labor (per unit)	$	94
Direct materials (per unit)		37
Variable overhead (per unit)		16
Total variable costs (per unit)	$	147
Fixed costs (annual):
Manufacturing	$	386,000
Selling		291,000
Administrative		790,000
Total fixed costs (annual)	$	1,467,000
Selling price (per unit)		410
Expected sales revenues, year 1 (24,000 units)	$	9,840,000

Eagle has an income tax rate of 30 percent.

Ms. Luray has set the sales target for year 2 at a level of $11,890,000 (or 29,000 radios).

Required:

a. What is the projected after-tax operating profit for year 1?

b. What is the break-even point in units for year 1? (Round up your answer to the nearest whole number.)

c. Ms. Luray believes that to attain the sales target (29,000 radios) will require additional selling expenses of $296,000 for advertising in year 2, with all other costs remaining constant. What will be the after-tax operating profit for year 2 if the firm spends the additional $296,000?

d. What will be the break-even point in sales dollars for year 2 if the firm spends the additional $296,000 for advertising? (Solve by computing volume in units first. Round up units to the nearest whole number and round your final answer to the nearest whole dollar amount.)

e. If the firm spends the additional $296,000 for advertising in year 2, what is the sales level in dollars required to equal the year 1 after-tax operating profit? (Solve by computing volume in units first. Round up units to the nearest whole number and round your final answer to the nearest whole dollar amount.)

f. At a sales level of 29,000 units, what is the maximum amount the firm can spend on advertising to earn an after-tax operating profit of $758,000? (Round intermediate calculations and final answer to the nearest whole dollar amount.)

Answer 1

a) projected after tax operating profit for year1
Particulars			Year 1
selling price per unit			410
less: variable cost			147
contribution per unit			263
total contribution (263*24000)			6312000
less: fixed cost			1467000
net income before tax			4845000
less: tax 30%			1453500
projected after tax operating profit			3391500
B) Break even point in units for year 1
BEP = fixed cost /contribution per unit
BEP = 1467000/263 = 5578
C)Projected after tax operating profit
particulars			year2
total contribution (29000*263)			7627000
less: fixed cost total			1467000
advertisement			296000
net income			5864000
less: tax 30%			1759200
projected after tax operating profit for yr 2			4104800
D) Break even point = fixed cost/contribution per unit
break even point = 1467000+296000/263
break even point = 6703
BEP in sales = 6703*410 = 1928230
E) Required sales = (fixed cost+profitbefore tax)/ contribution per unit
required sales = 1467000+296000+4845000/263
required sales =25125 unit
F) assume X be maximum amount that can be spent as advertisment
required sales = (fixed cost + profit before tax)/ contribution per unit
29000 unit = (1467000+X+1082857)/263
(29000*263)-1467000-1082857=X
X= 7627000-2549857
X= 5077143