Question

WEEK TWO: CHAPTER THREE HOMEWORK 0 Problem 3-62 (Algo) Extensions of the CVP Analysis-Taxes (LO 3-4) 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, yeart 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 (23,000 units) Eagle has an income tax rate of 40 percent. Ms. Luray has set the sales target for year 2 at a level of $10,608,000 for 26,000 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 (26.000 radios) will require additional selling expenses of $283.000 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 $283.000? d. What will be the break-even point in sales dollars for year 2 If the firm spends the additional $283,000 for advertising? .. If the firm spends the additional $283,000 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 26,000 units, what is the maximum amount the firm can spend on advertising to earn an after-tax operating profit of $757000?

Answer 1

Refer the below images for the above asked questions in a detailed way of solution.
solution : a What is the projected after-tax operating profit : for year I Amount particolars Sales (23000 units X 8408) variable cost (23000 units x $138) Contribution margin 893 24 000 $(3 174 000) $ 6210.000 $ (1464 000) $ 4746 000 $(1898400) Fixed costs Before -tox profit Taxes (40%. Vate) $ 2847600 After-tax profit → for year : b) What is the breakeven point Breakeren point (in units) = in units Fixed cost Sales price peronit - Variable cost per unit $1464000 - $408- $138 = $ 1464000 $270 = 5422 units (Rounded)

particulars Amount Sales (26000 units & $408) $10608000 Variable cost (26ooo units X $138) (3578000) contribution margin $ 7020 000 Fixed costs $ (17.47000) [s 1464600+ $283000] $5273000 Before a tax profit Taxes (407- Vate) [15273000X40th] § (2 109200) Aftera tax profit $ 3163800 d what will be year a it the the break even firm spends point in additional sales dollars $283000 for for advertising = cost selling cost Fixed & additional 1 Break even point (in dollars) loc Contribution • Contribution Sales margin ratio $1464000 + 283000 $ 6210000 7100 & 9324000 1747000 661 - $ 2646970

e) If the firm spends additional $283000 for what will be the sales tevel in dollars year, after tax operating profit : advertising yearsived in year a to easual Target in cruts profit - Fixed costs + ] profit Tax Savaget - Unit Contribution margin = $1747000 + [ $28476007 1-004 $408 - $138 = $1747000 + $ 4746000 $270 = $6493000 $70 = 24048 units (rounded) Sales dollars = 24048 oruts & $408 = $9811584

f. At a sales level of 26000 units, what is the amount the firm can spend on advertising after tax operating profit of $757000 maximum to earn an Amount particulars Sales (26000 units x 8408) variable cost (26000 units X & 138) contribution margin $10608000 $ (3588000) $ 7020000 Advertising Other fined costs costs $1464000 41261667 Before a tax profit r$ 757000 71004 $(504667) Takes (401- vote) $757000 After tax profit To find the maximum advertising cost to maintain after tax prefit of $757000, Salve as follows: contribution margin ($7620000) - Advertising costs - other Fixed costs ($ 1464000) = Before Tax profits ($1261667) $7020000 - $1464000 - $1261667 = Advertising Costs . Maximum Advertising costs = $4294333