Question

Famighetti Company's income statement for the most recent year appears below:

Sales (20,000 units)…………………………………. $600,000

Less: Variable expenses……………………………….360,000

Contribution margin………………………………… 240,000

Less: Fixed expenses…………………………………..242,000

Net operating loss………………………………… $(2,000)

1) How many units does the company need to sell in order to generate net income of $35,000?

2) Refer to the original information in the problem. The sales manager is convinced that a $50,000 expenditure on advertising will increase the company's unit sales by 25% without any other increase in fixed expenses. If the sales manager is correct, by how much would the company's net operating income increase or decrease?

Answer 1

	Contribution margin p.u = $2,40,000/20000 units
			= $12 per unit
1	Target Sales in Unit = Fixed Cost + Target Income/Contribution margin p.u
			= ($2,42,000+ $35000/$12 per unit
			23083.33
			= 23084 units
2
	Statement showing Increase/(decrease) in income
	Incremental Contribution	$ 60,000.00	(20000 units*25%*$12 p.u)
	Less: Incremental Cost	$ 50,000.00
	Incremental Income	$ 10,000.00
	If the company spends on advertising, its profit will be increased by $10,000