Question

S.L. Lo and​ Company, a manufacturer of quality handmade walnut​ bowls, has had a steady growth in sales for the past 5 years.​ However, increased competition has led Mr.Lo​,the​ president, to believe that an aggressive marketing campaign will be necessary next year to maintain the​ company's present growth. To prepare for next​ year's marketing​ campaign, the​ company's controller has prepared and presented Mr.Lo with the following data for the current​ year, 2017:

1.	What is the projected net income for 2017​?
2.	What is the breakeven point in units for 2017​?
3.	Mr. Lo has set the revenue target for 2018 at a level of $ 594,000 (or 22,000​bowls). He believes an additional marketing cost of $ 47,250 for advertising in 2018​, with all other costs remaining​ constant, will be necessary to attain the revenue target. What is the net income for 2018 if the additional $47,250 is spent and the revenue target is​ met?
4.	What is the breakeven point in revenues for 2018 if the additional $ 47,250 is spent for​advertising?
5.	If the additional $47,250 is​ spent, what are the required 2018 revenues for 2018 net income to equal 2017 net​ income?
6.	At a sales level of 22,000 units, what maximum amount can be spent on advertising if a 2018 net income of $60,000 is​ desired?

Variable cost (per bowl)
	Direct materials		$3.25
	Direct manufacturing labor		7
	Variable overhead (manufacturing, marketing, distribution and customer service)		3.25
		Total variable cost per bowl	$13.50
Fixed costs
	Manufacturing		$16,000
	Marketing, distribution, and customer service		132,500
		Total fixed costs	$148,500
Selling price			$27.00
Expected sales, 20,500 units			$553,500
Income tax rate			40%

Answer 1

Answer 1.
Projected Net Income of 2014
Particulars	Amount
No of Units Walnut Bowls Sold	20,500
SP per Bowl	$27
Total Sales revenue	$553,500
Less: Variable Cost ($13.50 X 20500 Units)	$276,750
Contribution	$276,750
Less: Fixed Cost	$148,500
Net Income	$128,250
Income Tax - 40% of $128250	$51,300
Net Income after Tax	$76,950
Answer 2.
Break Even Point = Fixed Costs / Contribution per Unit
Break Even Point = $148500/ $13.5 = 11000 Units
Answer 3.
Projected Net Income of 2015
Particulars		Amount
No of Units Walnut Bowls Sold		22000
SP per Bowl		$27
Total Sales revenue		$594,000
Less: Variable Cost ($13.50 * 22000 Units)		$297,000
Contribution		$297,000
Less: Fixed Cost	$148,500
Less: Additional Marketing Costs	$47,250	$195,750
Net Income		$101,250
Income Tax - 40% of $101,250		$40,500
Net Income after Tax		$60,750
Answer 4.
Break Even Point = Fixed Costs / Contribution per Unit
Break Even Point = $195,750/ $13.5 = 14500 Units
Answer 5.
Particulars		Amount
Net Income After Tax - 2014		$76,950
Add: Income Tax		$51,300
Net Income Before Tax		$128, 250
Less: Fixed Cost
Fixed Cost	$148,500
Marketing Cost	$47,250	$195,750
Contribution		$324,000
Contribution per Unit		$13.50
No. of Units Sold		24000
Required Sales Revenue (24000 Units X $27)		$648,000
Answer 6.
Particulars		Amount
Net income Desires		$60,000
Net Income before I Tax		$150,000
Total Contribution (22000 Units X $13.5)		$297,000
Total Fixed Cost		$147,000
Less: Fixed Cost -2014		$148,500
Marketing Cost (Maximum)		$ 0