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: 88 39 19 $ 146 Variable costs: Direct labor (per unit) Direct materials (per unit) Variable overhead (per unit) Total variable costs (per unit) Fixed costs (annual): Manufacturing Selling Administrative Total fixed costs (annual) Selling price (per unit) Expected sales revenues, year 1 (27,000 units) $ 397,000 295,000 795,000 $ 1,487,000 404 $ 10,908,000 Eagle has an income tax rate of 30 percent. Ms. Luray has set the sales target for year 2 at a level of $12,524,000 (or 31,000 radios).

Answer 1

a. Projected After Tax Operating Profit (Year-1)
	(a) Year-1
Selling Price/Unit	404
Less: Variable Costs/Unit	146
Contribution/Unit	258
[x] Units Sold	27,000
Total Contribution	6,966,000
Less: Fixed Costs	1,487,000
Operating Profit Before Tax	5,479,000
Less: Tax @ 30%	1,643,700
Operating Profit After Tax	3,835,300
b. Break-even Point in Units (Year-1)
Break-even Point (Units) =	Total Fixed Cost
	Contribution/Unit
=	1,487,000
	258
=	5764 Units
c. Projected After Tax Operating Profit (Year-2)
	(c) Year-2
Selling Price/Unit	404
Less: Variable Costs/Unit	146
Contribution/Unit	258
[x] Units Sold	31,000
Total Contribution	7,998,000
Less: Fixed Costs	1,776,000	($1,487,000+$289,000)
Operating Profit Before Tax	6,222,000
Less: Tax @ 30%	1,866,600
Operating Profit After Tax	4,355,400
d. Break-even Point (Units) =	1,776,000
	258
=	6884 Units
f. Sales Level to maintain same level of Operating Profit After Tax in Year-2
	$
Operating Profit Before Tax (Year-1)	5,479,000	To maintain same level of Profit After Tax in Year-2
Add: Fixed Costs (Year-2)	1,776,000
Total Contribution Required (Year-2)	7,255,000	(At this level Op. Profit in Year-1 = Op. Profit in Year-2)
[/] Contribution/Unit	258
Sales Level to maintain Profit	28,120 Units
g. Operating Profit After Tax $762,000 when sales = 31000 Units
	$
Total Contribution @ 31000 Units	7,998,000
Less: Fixed Costs other than advertising	1,487,000
Operating Before Tax & Advertising	6,511,000
Operating Profit Before Tax	1,088,571	(Required to earn after tax profit of $762,000)
Maximum amount that can be spent on Advertisement	5,422,429
Note
Operating Profit After Tax (70%)	762,000
Operating Profit Before Tax (100%)	1,088,571