Question

Connelly Inc., a manufacturer of quality electric ice cream makers, has experienced a steady growth in sales over the past few years. Because her business has grown, Jan De Janey, the president, believes she needs an aggressive advertising campaign next year to! maintain the company's growth. To prepare for the growth, the accountant prepared the following data for the current year $ 20.00 24.00 10.00 54.00 $ Variable costs per ice cream maker Direct labor Direct materials Variable overhead Total variable costs Fixed costs Manufacturing Selling Administrative Total fixed costs Selling price per unit Expected sales (units) $101,000 48,000 366,000 $515,000 100 50,500 Required: 1. If the costs and sales price remain the same, what is the projected operating profit for the coming year? 2 What is the breakeven point in units for the coming year? 3. Jan has set the sales target for 54,400 ice cream makers, which she thinks she can achieve by an additional fixed selling expense of $226,600 for advertising. All other costs remain as per the data in the above table. What will be the operating profit if the additional $226,600 is spent on advertising and sales rise to 54,400 units? 4-a. What will be the new breakeven point if the additional $226,600 is spent on advertising? 4-b. Prepare a contribution income statement at the new breakeven point. 4-c. What is the percentage change in both fixed costs and in the breakeven point? 5. If the additional $226,600 is spent for advertising in the next year, what is the sales level (in units) needed to equal the current year's operating profit at 50,500 units?

Answer questions 1 through 5 Connelly Inc.

Answer 1

Sales ($100 per unit x 50,500 units) $5,050,000 Less: Variable Costs ($54 per unit x 50,500 units) ($2,727,000) Contribution Margin $2,323,000 Less: Fixed Costs ($515,000) Operating Profit $1,808,000 2. Breakeven point in units for the coming year = Fixed Costs/(Selling Price per Unit - Variable Cost per Unit) = $515,000 / ($100 - $54) = 11,196 units rounded 3. Sales ($100 per unit x 54,400 units) $5,440,000 Less: Variable Costs ($54 per unit x 54,400 units) ($2,937,600) Contribution Margin $2,502,400 Less: Fixed Costs($515,000 + $226,600) ($741,600) Operating Profit $1,760,800 4a. Breakeven point in units for the coming year= Fixed Costs/(Selling Price per Unit - Variable Cost per Unit) = $741,600 /($100 - $54) = 16,122 units rounded

4b. Sales ($100 per unit x 16,122 units) $1,612,200 Less: Variable Costs ($54 per unit x 16,122 units) ($870,588) Contribution Margin $741,612 Less: Fixed Costs($515,000 + $226,600) ($741,600) Operating Profit $12 4c. Fixed Costs Percentage Change = (New Fixed Costs - Old Fixed Costs) / Old Fixed Costs = ($741,600 - $515,000) / $515,000 = 44% Break-Even Point Percentage Change = (New Break-Even Point - Old Break-Even Point) / Old Break-Even Point = (16,122 units - 11,196 units) / 11,196 units = 43.99 or 44% rounded 5. Required Sales in Units = (Fixed Costs + Target Profit)/(Selling Price per Unit - Variable Cost per Unit) Note that our target profit figure is equal to $1,808,000, as calculated in part 1. = ($741,600 + $1,808,000) / ($100 per unit - $54 per unit) = 55,426 units.