Question

The budgeted income statement of Port Williams Gift Shop is given below:

Net revenue                                                                            $600,000

Less: expenses, including $300,000 of fixed expenses         660,000

Net loss                                                                                   $(60,000)

                                                                           =======

The manager believes that an increase of $150,000 on advertising outlays will increase sales substantially.

Find out: 1. At what sales volume will the store break even after spending $150,000 on advertising

2. What sales volume will result in a net profit of $30,000?

by salam

Answer 1

Income statement

sales	600,000
Variable expense	-360,000
Contribution margin	240,000
Fixed expense	-300,000
Net loss	-$60,000

1

Increase in advertising cost = $150,000

New fixed expense = Old fixed expense + Increase in advertising cost

= 300,000 + 150,000

= $450,000

Contribution margin ratio = Contribution margin/Sales

= 240,000/600,000

= 40%

Break even sales = Fixed expense/Contribution margin ratio

= 450,000/40%

= $1,125,000

Hence, store will beak even at $1,125,000 sales even after spending $150,000 on advertising.

2.

Sales to earn target profit = (Fixed expense + Target profit)/Contribution margin ratio

= (450,000 + 30,000)/40%

= $1,200,000

$1,200,000 sales will result in $30,000 net profit.