Question

Bell Magnum Helmet Ltd successfully makes high quality bicycle helmets. Recently increased competition from overseas suppliers has led to the decision to begin a strong advertising campaign in the next year. The company’s accountant presented to management the following summarised financial information for the current year. Variable Costs per helmet ($) Direct Materials 8.00 Direct Labour 16.00 Variable selling costs 6.00 Total 30.00 Fixed Costs ($) Manufacturing 50,000 Selling 80,000 Administrative 140,000 Total 270,000 Expected Current Year Sales (20,000 helmets @$50) $1,000,000 Required: (a) Calculate the breakeven point in units for the current year. (b) Calculate the margin of safety. (c) Calculate the number of helmets that needs to be sold if the management would like to earn an operating profit of $150,000. (d) Calculate the selling price that the company must use if it wants to produce 25,000 helmets and to earn an operating profit of $280,000. Assume that there is no change in variable cost per unit ($30) or fixed costs ($270,000). (e) Assume that the company wants to increase the sales commission by $2 per unit and also increase spending on advertising to achieve double the annual unit sales. By how much could advertising be increased with profits remaining unchanged? Use the incremental analysis approach.

Answer 1

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