Question

R.T. Ko and Company, a manufacturer of quality handmade walnut bowls, has had a steady growth in sales for the past 5 years. However, increased competition has led Mr. Ko, 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 company's controller has prepared and presented Mr. Ko with the following data for the current year, 2017: (Click the icon to view the data.) i Requirements Read the requirements. advertising in 2018, with all other costs remaining constant, WiII DE spent and the revenue target is met? 1. What is the projected net income for 2017? The target net income for 2018 is $ 84,630 2. What is the breakeven point in units for 2017? Requirement 4. What is the breakeven point in revenues for 2018 Mr. Ko has set the revenue target for 2018 at a level of $728,500 (or 23,500 bowls). He believes an additional marketing cost of $52,700 for advertising in 2018, with all other costs remaining constant, will be necessary to attain the revenue target. What is the net The breakeven point in revenues for 2018 is $ 446,400 income for 2018 if the additional $52,700 is spent and the revenue target is met? Requirement 5. If the additional $52,700 is spent, what are the re What is the breakeven point in revenues for 2018 if the additional $52,700 is spent for advertising? Using the basic formula determined in requirement 1, compute the 5. If the additional $52,700 is spent, what are the required 2018 revenues for 2018 net income to equal 2017 net income? The required number of units is 25,400 . 6. At a sales level of 23,500 units, what maximum amount can be spent on advertising if a 2018 net income of $84,330 is desired? The required revenue is $ . Print Done Enter any number in the edit fields and then click Check Answ

Answer 1

Amount ($) $ 6,82,000 1. Determination of the Net Income of Year 2017 : Particulars Calculation Sales Revenue 22,000 Units @ $ 31 Less : Variable Costs Direct Material 22,000 Units @ $ 3.25 Direct Manufacturing Labor 22,000 Units @ $ 7.50 Other Variable Overheads 22,000 Units @ $ 4.75 Contribution Less : Fixed Costs Manufacturing Given Marketing, Distribution and Customer Service Given Income before Tax Less : Income Tax @ 40 % Net Income $ $ $ $ 71,500 1,65,000 1,04,500 3,41,000 A toto a 14,000 1,56,500 1,70,500 68,200 1,02,300 $ $ 2. Determination of the Break-Even Point for the Year 2017 : Break - Even Point = – Fixed Costs Contribution Margin Break - Even Point = – $ 170,500 $ 15.50 per Unit Therefore, Break-Even Point = 11,000 Units ($ 341,000)

Amount ($) $ 7,28,500 $ $ 3. Determination of the Net Income of Year 2018 : Particulars Calculation Sales Revenue 23,500 Units @ $ 31 Less : Variable Costs Direct Material 23,500 Units @ $ 3.25 Direct Manufacturing Labor 23,500 Units @ $ 7.50 Other Variable Overheads 23,500 Units @ $ 4.75 Contribution Less : Fixed Costs Manufacturing Given Marketing, Distribution and Customer Service Given Additional Marketing Cost Given Income before Tax Less : Income Tax @ 40 % Net Income 76,375 1,76,250 1,11,625 3,64,250 $ $ 14,000 1,56,500 52,700 1,41,050 56,420 84,630 $ $ $ 4. Determination of the Break-Even Point for the Year 2018 : Break - Even Point = Fixed Costs Contribution Margin Break - Even Point = – $ 223,200 $ 15.50 per Unit Therefore, Break-Even Point = 14,400 Units ($ 446,400)

5. Determination of the Revenue to maintain the same profit as Year 2017 : Particulars Calculation Amount ($) Net Income $ 1,02,300 Add : Income Tax @ 40 % $ 68,200 Profit before Tax 1,70,500 Add : Fixed Expenses Manufacturing Given 14,000 Marketing, Distribution and Customer Service Given 1,56,500 Additional Marketing Cost Given 52,700 Required Contribution 3,93,700 P/V Ratio (Calculated from Original Data) Contribution / Sales 50% Therefore, Sales Revenue (In $) Contribution / P/v Ratio $ 7,87,400 Therefore, Sales Revenue (In Units) $ 787,400 / $ 31 25,400 $ uu 6. Determination of the Advertising Amount to earn a Income of $ 84,330 : Particulars Calculation Amount ($) Sales Revenue 23,500 Units @ $ 31 $ 7,28,500 Less : Variable Costs Direct Material 23,500 Units @ $ 3.25 $ 76,375 Direct Manufacturing Labor 23,500 Units @ $ 7.50 $ 1,76,250 Other Variable Overheads 23,500 Units @ $ 4.75 $ 1,11,625 Contribution $ 3,64,250 Less : Fixed Costs Manufacturing Given $ 14,000 Marketing, Distribution and Customer Service Given $ 1,56,500 Additional Marketing Cost Given 53,200 Income before Tax 1,40,550 Less : Income Tax @ 40 % 56,220 Net Income $ 84,330 toto to totoo Therefore, it can spend $ 53,200 as advertising cost to earn a Net Income of $ 84,330.