Question

Connelly 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 De Janey, 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: $ 23.00 27.50 11.50 $ 62.00 Variable costs per ice cream maker Direct labor Direct materials Variable overhead Total variable costs Fixed costs Manufacturing Selling Administrative Total fixed costs Selling price per unit Expected sales (units) $ 98,500 68,500 398,000 $ 565,000 115 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? Complete this question by entering your answers in the tabs below.

Answer 1

1.Projected Operating profit = Sales Revenue - Variable costs - Fixed costs
=(115-62)*58500-565000
i.e.	2,535,500
2.Break even point in units = Fixed costs/Contribution Margin per unit
=565000/(115-62)
10660.37736	units
i.e. 10660 units
3.Operating profit = (115-62)*61800 - 565000-259900
2,450,500
4-a Break even point	15564.15094	units
i.e. 15564 units
Contribution Format Income Statement
Sales Revenue	1789860
Less: variable costs	964968
Contribution Margin	824892
Less: Fixed costs
Original	565000
Incremental	259900
Net Operating Income	-8
% change in fixed cost	46.00%
% change in break even point	46.00%
Required Sales	63403.77358	units
i.e. 63404 units

=(115-62) *58500-565000 1 1.Projected Operating profit = Sales Revenue - Variable costs - Fixed costs 2 =(115-62) *58500-565000 3 i.e. 4 5 2.Break even point in units = Fixed costs/Contribution Margin per unit 6 -565000/(115-62) 7 =565000/(115-62) 8 i.e. 10660 units 9 10 3.Operating profit = (115-62)*61800 - 565000-259900 11 =(115-62)*61800 - 565000-259900 12 =(565000+259900)/(115-62) 13 4-a Break even point 14 i.e. 15564 units 15 =15564*115 =15564*62 =B17-B18 16 Contribution Format Income Statement 17 Sales Revenue 18 Less: variable costs 19 Contribution Margin 20 Less: Fixed costs 21 Original 22 Incremental 23 Net Operating Income 565000 259900 =B19-SUM(B21:B22) 24 =259900/565000 =(15564-10660)/10660 25 % change in fixed cost 26 % change in breakeven point 27 28 Required Sales 29 i.e. 63404 units =(2535500+259900+565000)/(115-62) unit