Grand’s Sporting Goods is a retailer of sporting equipment. Last year, Grand’s sales revenues totalled $6,000,000. Total expenses were $2,100,000. Of this amount, approximately $1,500,000 were variable, while the remainder were fixed. Since Grand’s Sporting Goods offers thousands of different products, its managers prefer to calculate the break-even point in terms of sales dollars rather than units.
1. What is Grand’s Sporting Goods’ current operating income (prepare a contribution margin format income statement)?
2. What is Grand’s contribution margin ratio?
3. What is Grand’s break-even point in sales dollars? (Hint: The contribution margin ratio calculated in Requirement 2 is already weighted by Grand’s Sporting Goods’ actual sales mix.)
4. Grand’s top management is deciding whether to embark on a $200,000 advertisement campaign. The marketing firm has projected annual sales volume to increase by 15% as a result of this campaign. Assuming that the projections are correct, what effect would this advertising campaign have on Grand’s Sporting Goods’ annual operating income?