Question

Xavier Medical Supply is a retailer of home medical equipment. Last year, Xavier's sales revenues totaled $6,800,000. Total expenses were $2,600,000. Of this amount, approximately $1,088,000 were variable, while the remainder were fixed. Since Xavier's offers thousands of different products, its managers prefer to calculate the breakeven point in terms of sales dollars rather than units. Read the requirements. Contribution margin Sales revenue - Contribution margin ratio (Enter the ratio as a whole percent.) The contribution margin ratio is 84 %. Requirement 3. What is the company's breakeven point in sales dollars? (Hint: The contribution margin ratio calculated in Requirement 2 is already weighted by the company's actual sales mix.) Begin by identifying the formula to compute the breakeven point in sales dollars. ( Fixed expenses + Operating income / Contribution margin ratio = Breakeven sales in dollars (Round your answer up to the nearest whole dollar.) The breakeven point in sales dollars is $ 1,800,000 . Requirement 4. Xavier's top management is deciding whether to embark on a $240,000 advertising campaign. The marketing firm has projected annual sales volume to increase by 15% as a result of this campaign. Assuming that the projections are correct, what effect would this advertising campaign have on the company's annual operating income? %, which If Xavier embarks on this advertising campaign, sales revenue and variable costs will will cause the contribution margin to %. However, fixed costs will the advertising. due to

Answer 1

Answer to Requirement-4 (Requested part of the question): Variable costs are those costs which would remain the same per unit irrespective of level of production or sales. It is an unit cost to be incurred by the firm only when the firm carries out its business operation. Contribution margin is nothing but the difference between sale value and variable costs. Therefore, when sales volume changes, it is obvious that variable costs and contribution margin will also change in the same direction proportionately. Fixed costs are those costs which would remain the same in total irrespective of level of production or sales. It is a committed cost to be incurred by the firm whether it carries out operations or not. Therefore, If Xavier embarks on this advertising campaign, sales revenue and variable costs will INCREASE by 15% which will cause the contribution margin to INCREASE by 15%. However, fixed costs will INCREASE by $240,000 due to the advertising.