Eagle Company makes the MusicFinder, a sophisticated satellite radio. Eagle has experienced a steady growth in sales for the past five years. However, Ms. Luray, Eagle's CEO, believes that to maintain the company's present growth will require an aggressive advertising campaign next year. To prepare for the campaign, the company's accountant, Mr. Bednarik, has prepared and presented to Ms. Luray the following data for the current year, year 1:
Variable costs: | ||
Direct labor (per unit) | $ | 87 |
Direct materials (per unit) | 40 | |
Variable overhead (per unit) | 15 | |
Total variable costs (per unit) | $ | 142 |
Fixed costs (annual): | ||
Manufacturing | $ | 400,000 |
Selling | 281,000 | |
Administrative | 796,000 | |
Total fixed costs (annual) | $ | 1,477,000 |
Selling price (per unit) | 416 | |
Expected sales revenues, year 1 (25,000 units) | $ | 10,400,000 |
Eagle has an income tax rate of 30 percent.
Ms. Luray has set the sales target for year 2 at a level of $11,648,000 (or 28,000 radios).
Required:
a. What is the projected after-tax operating profit for year 1?
b. What is the break-even point in units for year 1? (Round up your answer to the nearest whole number.)
c. Ms. Luray believes that to attain the sales
target (28,000 radios) will require additional selling expenses of
$295,000 for advertising in year 2, with all other costs remaining
constant. What will be the after-tax operating profit for year 2 if
the firm spends the additional $295,000?
d. What will be the break-even point in sales dollars for year 2 if the firm spends the additional $295,000 for advertising? (Solve by computing volume in units first. Round up units to the nearest whole number and round your final answer to the nearest whole dollar amount.)
e. If the firm spends the additional $295,000 for advertising in year 2, what is the sales level in dollars required to equal the year 1 after-tax operating profit? (Solve by computing volume in units first. Round up units to the nearest whole number and round your final answer to the nearest whole dollar amount.)
f. At a sales level of 28,000 units, what is the maximum amount the firm can spend on advertising to earn an after-tax operating profit of $765,000? (Round intermediate calculations and final answer to the nearest whole dollar amount.)
Answer;-
a. What is the projected after-tax operating profit for year 1?
Particulars | Calculation | Amount $ |
Sales Revenue | 416*25000 | 104,00,000 |
Less: Expenses & Costs | ||
Total Variable Cost | $142*25000 | ( 35,50,000) |
Total Fixed Costs | Given | ( 14,77,000) |
Operating profit before Tax | 53,73,000 | |
Tax Bracket 30% | 5373000*30% | 16,11,900 |
Operating Profit After Tax | 37,61,100 | |
Answer | ||
b. What is the break-even point in units for year 1? (Round up your answer to the nearest whole number.)
Answer:-
Sales Price = $ 416
Total Variable Cost Per Unit = $142
Contribution per Unit = $416-142 = $274
Break Even unit = Total Fixed Overhead costs / Contribution per unit
= 1477000/274 = 5390.51
Nearest Whole Number = 5391 units ( Answer)
c. Ms. Luray believes that to attain the sales target (28,000 radios) will require additional selling expenses of $295,000 for advertising in year 2, with all other costs remaining constant. What will be the after-tax operating profit for year 2 if the firm spends the additional $295,000?
Answer;-
28000 radios X Contribution per unit = 28000 X 274 = $76,72,000
= Contribution - Fixed costs - Additional Advertisment cost = operating profit before taxes
= $76,72,000- $14,77,000 - $ 2,95,000 = $59,00,000
Operating profit after tax = Operating profit Before Tax X ( 1- 0.3)
= $59,00,000 X 0.70
= $41,30,000 Answer.
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