Question

The annual data that follow pertain to Rays​, a manufacturer of swimming goggles​ (the company had no beginning​ inventory):

Sales price. . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$43
Variable manufacturing expense per unit. . . . .	$17
Sales commission expense per unit. . . . . . . . .	$9
Fixed manufacturing overhead. . . . . . . . . . . . .	$1,640,000
Fixed operating expenses. . . . . . . . . . . . . . . . .	$230,000
Number of goggles produced. . . . . . . . . . . . . .	205,000
Number of goggles sold. . . . . . . . . . . . . . . . . .	190,000

Rays

Income Statement (Absorption Costing)

For the Year Ended December 31

Sales revenue $8,170,000

Less: Cost of goods sold: 4,750,000

Gross profit : 3,420,000

Less: Operating expenses : 1,940,000

Operating income: $1,480,000

(VARIABLE COST)

Sales revenue----------$8,170,000

Less: Variable expenses

Variable cost of goods sold----------$3,230,000

Variable operating expenses----------1,710,000

Contribution margin ---------------3,230,000

Less: Fixed expenses

Fixed manufacturing overhead----------1,640,000

Fixed operating expenses ------------230,000

Operating income ---------------$1,360,000

(QUESTION TO ANSWER) The company marketing vice president believes a new sales promotion that costs $165,000 would increase sales to 205,000 goggles. Should the company go ahead with the​ promotion? Give your reason.

Use the contribution margin income statement format to evaluate sales promotion. (PLEASE SHOW WORK ON HOW YOU GET YOUR ANSWER)

Increase in contribution margin
Increase in fixed expenses
Increase in operating income

Answer 1

Variable cost per unit = (Highest activity cost – Lowest activity cost)/(Highest activity unit – Lowest activity unit)

= (28,500 - 20,900)/(3,800 - 1.800)

= 7,600/2,000

= $3.8

Fixed cost = Highest activity cost – (Variable cost per unit x Highest activity unit)

= 28,500 - (3.8 x 3,800)

= 28,500 - 14,440

= $14,060

Total cost of 2,900 lab test (Y) = Fixed cost + (Variable cost per unit x Number of lab test)

= 14,060 + (3.8 x 2.900)

= 14,060 + 11,020

Y = $25,080

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