Question

3-41 CVP analysis, income taxes. (CMA, adapted) J.T. Brooks and Company, a manufacturer of quality handmade walnut bowls, has had a steady growth in sales for the past 5 years. However, increased competi- tion has led Mr. Brooks, 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 com- pany's controller has prepared and presented Mr. Brooks with the following data for the current year, 2017: Variable cost (per bowl) Direct materials $ 3.00 Direct manufacturing labor 8.00 Variable overhead (manufacturing, marketing, distribution, and customer service) 7.50 Total variable cost per bowl $ 18.50 Fixed costs Manufacturing $ 20,000 Marketing, distribution, and customer service 194,500 Total fixed costs $214,500 Selling price $ 35.00 Expected sales, 22,000 units $770,000 Income tax rate 40% 1. What is the projected net income for 2017? 2. What is the breakeven point in units for 2017? 3. Mr. Brooks has set the revenue target for 2018 at a level of $875,000 (or 25,000 bowls). He believes an ad- ditional marketing cost of $16,500 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 $16,500 is spent and the revenue target is met? 4. What is the breakeven point in revenues for 2018 if the additional $16,500 is spent for advertising? 5. If the additional $16,500 is spent, what are the required 2018 revenues for 2018 net income to equal 2017 net income? 6. At a sales level of 25,000 units, what maximum amount can be spent on advertising if a 2018 net income of $108,450 is desired?

Answer 1

② Calculation for projected net income for 2014 SOG-01 $ Salis (22070x356)_ 170,000 hiss Variable cost (22070 x 18.5$) (407, ovo) - Contribution . 36 3,6vo ass Find Cost - (21 4 500) - Partit . 148 500 uss tan at 40% 69,400) - Net income. @ Break even point - Calculation ( for 2017): BEP (in units) = Fined Cost = 214,500 contribution funit (35 18,5) 13000 units * Rwenue Easget for 2018 - $ 875 000 n astro unis Additional marketing ast (considered estined cast) $16,560.

Calculation of out is come for 2018. Sales 8$5000. berbeniable cost (25 nvo x18.5) (462,500) - Contribution-412, 500 ass floud ast (214500 +16560) (2 31, ove) - Putit - 18 6 500 urss Tan @ 40%. (42,600) Net income - 108,900 sog-01 Breakeren prial is sevene po 2018 : BE P(isumik) = fined cost 214500 116500 pado contribution - 16.5 - unit : 141vo mits BEP (in svenee) = 14000 x $35= 490,000 $

6. Required 2018 revenue for 2018 met income to - equal 2014 net income Here 2018 net income should be $89, 100/2014 net income). Net in come 89 100 i Dafit (8900 7 148,500 60% ] fined cost [214.500+ 165v0] 231,170 :. Contribution [ 231670 +1486007 349,500 82 Contribution (unit 16.50 ". No. of units 23 ovo mits . (3495007 I the Wanns 805 ovo [43160x854]

845,000 Sales ca 500x356) Variable cost (25 000 x 18,5) Contribution hiss fined cost 462,500 -H12,500 . Desired Profit r 108,450°7 U Gouda 180,750 l. fined Cost = 1412610 18097507 2 31,450 Amount that can be spent on advertising - F 231750 – 214,5007 94,250