Question

Last year Bidwell company had the following data for its only product, Product SD:

Fixed               Variable

Sales (100,000)                                                                                   $1,000,000

            Expenses:

            Direct Materials                                               $300,000

            Direct Labor                                                    200,000

            Manufacturing Overhead        $100,000         150,000

            Selling and Administrative      110,000           50,000

Total Expenses                                    210,000           700,000           910,000

Net Operating Income                                                                         $90,000

The company produced and sold 100,000 units during the year and had no beginning or ending inventories. Suppose management believes that a $15,000 increase in annual advertising expense will result in a considerable increase in sales.

1. Based on last year’s data, how much would sales revenue have to increase for the company to be economically indifferent between doing the advertising campaign and not doing the advertising campaign?

2. Based on last year’s data, the number of units of Product SD that Bidwell must sell to breakeven in the coming year is:

Answer 1

1.Increase in cost due to advertising campaign should be offset by increase in contribution margin, that will be the indifferent point.

Calculation of contribution margin per unit:

Sales	1,000,000
Less: Variable Cost
Direct Material	300,000
Direct Labor	200,000
Manufacturing Overhead	150,000
Selling and Administrative	50,000
Total Expenses	700,000
Contribution Margin	300,000
Contribution Margin Ratio	30%

Increase in Sales revenue required = Additional Fixed Cost/Contribution Margin ratio

= $15,000/0.3 = $50,000

2.Breakeven point in units = Total Fixed Cost/Contribution Margin per Unit

= 210,000/3 = 70,000 units