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)	$	85
Direct materials (per unit)		36
Variable overhead (per unit)		11
Total variable costs (per unit)	$	132
Fixed costs (annual):
Manufacturing	$	391,000
Selling		283,000
Administrative		789,000
Total fixed costs (annual)	$	1,463,000
Selling price (per unit)		419
Expected sales revenues, year 1 (25,000 units)	$	10,475,000

Eagle has an income tax rate of 35 percent.

Ms. Luray has set the sales target for year 2 at a level of $12,151,000 (or 29,000 radios).

Required: Please show Work

d. What will be the break-even point in sales dollars for year 2 if the firm spends the additional $295,000 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 $295,000 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 $769,000? (Round intermediate calculations and final answer to the nearest whole dollar amount.)

Answer 1