Question

L.D. Marx 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. Marx, 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. Marx with the following data for the current year, 2017: (Click the icon to view the data.) Read the requirements Requirement 1. What is the projected net income for 2017? Using the equation method, select the basic formula used to compute the target net income for 2017 X - Requirements 0 X Data Table Variable cost (per bowl) Direct materials Direct manufacturing labor Variable overhead (manufacturing, marketing, distribution and customer service) 3.75 7.00 4.75 1. What is the projected net income for 2017? 2. What is the breakeven point in units for 2017? Mr. Marx has set the revenue target for 2018 at a level of $728.500 (or 23,500 bowls). He believes an additional marketing cost of $52,700 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 $52,700 is spent and the revenue target is met? 4. What is the breakeven point in revenues for 2018 if the additional $52,700 is spent for advertising? 5. If the additional $52,700 is spent, what are the required 2018 revenues for 2018 net income to equal 2017 net income? 6. At a sales level of 23,500 units, what maximum amount can be spent on advertising if a 2018 net income of $84,480 is desired? $ 15.50 $ Total variable cost per bowl Fixed costs Manufacturing Marketing, distribution, and customer service Total fixed costs Selling price Expected sales, 22,000 units Income tax rate 14,000 156,500 170,500 $ Print Done $ $ 31.00 682,000 40% Print Done

Answer 1

Requirement 1 Particulars Selling Price per unit Variable expenses per unit Contribution per unit Unit Sales Total Contribution (-) Fixed expenses Net income before tax (-) Tax (170500*40%) Net Income after tax For 2017 31.00 -15.50 15.50 22000 3,41,000 -1,70,500 1,70,500 -68,200 1,02,300 The Projected Net Income for 2017 is $ 102,300. Requirement 2 Fixed costs Contribution per unit 1,70,500 15.50 Break-even point (in unit sales) (Fixed Cost/Contribution per unit) 11,000 units (170500/15.50) The break-even point is 11,000 units.

Requirement 3 Particulars Selling Price per unit Variable expenses per unit Contribution per unit Unit Sales Total Contribution (-) Fixed expenses (170500+52700) Net income before tax (-) Tax (141050*40%) Net Income after tax For 2018 31.00 -15.50 15.50 23500 3,64,250 -2,23,200 1,41,050 -56,420 84,630 $ The Projected Net Income for 2018 is $ 84,630. Requirement 4 Fixed costs Contribution per unit 2,23,200 15.50 $ Break-even point (in unit sales) (Fixed Cost/Contribution per unit) 14,400 units (223200/15.50) The break-even point is 14,400 units.

Requirement 5 The projected Net income for 2017 (+) Tax (102300*40/60) Required Income before tax (+) Fixed expenses Required Contribution Contribution per unit Required Unit sales (393700/15.50) Selling price per unit Required Revenue (25400*31) 1,02,300 68,200 1,70,500 2,23,200 3,93,700 15.50 25400 31.00 7,87,400 $ The required 2018 revenue to equal 2017 projected Net income is $ 787,400. Requirement 6 The projected Net income for 2017 (+) Tax (84480*40/60) Required Income before tax (-) Total Contribution (23500*15.5) Total allowable fixed expenses (-) Fixed costs other than advertising Maximum allowable advertising costs 84,480 56,320 1,40,800 -3,64,250 2,23,450 -1.70,500 52,950 Ś $ At sales level of 23,500 units, the maximum amount that can be spent on advertising if net income of $ 84,480 is desired is $ 52,950.