Question

In: Accounting

onnelly Inc., a manufacturer of quality electric ice cream makers, has experienced a steady growth in...

onnelly 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 $ 23.00
Direct materials 27.50
Variable overhead 11.50
Total variable costs $ 62.00
Fixed costs
Manufacturing $ 98,500
Selling 68,500
Administrative 398,000
Total fixed costs $ 565,000
Selling price per unit $ 115
Expected sales (units) 58,500

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 61,800 ice cream makers, which she thinks she can achieve by an additional fixed selling expense of $259,900 for advertising. All other costs remain as per the data in the above table. What will be the operating profit if the additional $259,900 is spent on advertising and sales rise to 61,800 units?

4-a. What will be the new breakeven point if the additional $259,900 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 $259,900 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 58,500 units?

Solutions

Expert Solution

1. πB= Sales − variable cost − fixed cost
        = 58500($115) − 58,500($62) − $565,000
        = $2,535,500
2. BE units:    $115Q = $62Q + $565,000
                            Q = 10,660 units
3.    πB = 61,800($115) − 61,800($62) − $565,000 − $259900
             = $2,450,500
(operating profit falls by $85,000 = [($53 x 3,300) − $259,900], from $2,5355,00to $2,450,500 as a result of the plan to increase sales with increased advertising)
4. BE units:   $115Q = $62Q + $824,900
                          Q = 15,565 units (rounded up)
                                                                         
5. 2,53,500 = $115Q − $62Q − $824,900
                Q = 47,887 units
(to justify the advertising plan, sales would have to rise to at least 63,804 units, somewhat above the projected level of 58,500 units)
Part 4: Contribution Income Statement
     Sales revenue (p × Q) $1,789,975
     Less: Variable costs (v × Q) $965,030
     Contribution margin $824,945
     Less: Fixed cost (F):
            Original amount $             565,000
            Incremental amount $             259,900 $824,900
     Operating profit $45
     Percentage increase in fixed cost (F):
          New level of fixed cost $824,900
          Original level of fixed cost $565,000
                     Percentage increase 46.00%
     Percentage increase in breakeven point:
          New breakeven point (rounded up)                              15,565
          Original breakeven point                              10,660
                      Percentage increase 46.01%

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