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 $ 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). Required: a. What is the projected after-tax operating profit for year 1? b. What is the break-even point in units for year 1? c. Ms. Luray believes that to attain the sales target (31,000 radios) will require additional selling expenses of $289,000 for advertising in year 2, with all other costs remaining constant. What will be the after-tax operating profit for year 2 if the firm spends the additional $289,000? d. What will be the break-even point in sales dollars for year 2 if the firm spends the additional $289,000 for advertising? e. If the firm spends the additional $289,000 for advertising in year 2, what is the sales level in dollars required to equal the year 1 after-tax operating profit? f. At a sales level of 31,000 units, what is the maximum amount the firm can spend on advertising to earn an after-tax operating profit of $762,000?

Answer 1

a) operating profit after tax for Yr - 1 109,08000 Calculation of projected Sales less. Variable Cost Direct Labour Direct Material Variable olH less: Fixed Cost Manufacturing 2376ero 10.53,000 513,000 6966000 Contribution 397000 2.95000 Selling Administrative 795ooo operating profit 54,79000 1643700 less: Tax @ 30% Operating profit after tax 3835,300 for Yo-1 (6) Break even point a Fired Cost Centribution pou 1487000 x 27000 = 5763.566 units 6966000 Scanned with CamScanner

Contribution (1) Calculation of operating profit after taxe for year-2 Sales (31000 x 40u) 125,24000 less: Variable Cost Direct labor (31000 x 88) 2728000 Direct Material (31000 439) 12,0govo Variable OlH (31000 X 19) 580000 79,98000 less: fixed cost Mamefacturing 39700 Selling ( 295000 + 289000) 584000 795000 operating profit 62,22,000 less : Tax @ 30% 1866,600 43.55400 operating profit after Tax Administrative CS Scanned with CamScanner