Question

Exercise 9-21 Breakeven Planning; Profit Planning [LO 9-2, 9-3]

Connelly Inc., a manufacturer of quality electric ice cream makers, has experienced a steady growth in sales over the past few years. Because her business has grown, Jan DeJaney, the president, believes she needs an aggressive advertising campaign next year to maintain the company’s growth. To prepare for the growth, the accountant prepared the following data for the current year:

Variable costs per ice cream maker
Direct labor	$	8.00
Direct materials		9.00
Variable overhead		4.00
Total variable costs	$	21.00
Fixed costs
Manufacturing	$	88,500
Selling		45,500
Administrative		452,000
Total fixed costs	$	586,000
Selling price per unit	$	40
Expected sales (units)		74,000

Required:

1. If the costs and sales price remain the same, what is the projected operating profit for the coming year?

2. What is the breakeven point in units for the coming year?

3. Jan has set the sales target for 80,800 ice cream makers, which she thinks she can achieve by an additional fixed selling expense of $175,800 for advertising. All other costs remain as per the data in the above table. What will be the operating profit if the additional $175,800 is spent on advertising and sales rise to 80,800 units?

4-a. What will be the new breakeven point if the additional $175,800 is spent on advertising?

4-b. Prepare a contribution income statement at the new breakeven point.

4-c. What is the percentage change in both fixed costs and in the breakeven point?

5. If the additional $175,800 is spent for advertising in the next year, what is the sales level (in units) needed to equal the current year’s operating profit at 74,000 units?

Answer 1