Hacker Aggregates mines and distributes various types of rocks. Most of the company’s rock is sold to contractors who use the product in highway construction projects. Treva Hacker, company president, believes that the company needs to advertise to increase sales. She has proposed a plan to the other managers that Hacker Aggregates spend $100,000 on a targeted advertising campaign. The company currently sells 25,000 tons of aggregate for total revenue of $5,000,000. Other data related to the company’s production and operational costs follow:
Direct labor ............$1,500,000
Variable production overhead ..... 200,000
Fixed production overhead ...... 350,000
Selling and administrative expenses:
Variable .............. 50,000
Fixed ............... 300,000
A. Compute the break-even point in units (i.e., tons) for Hacker Aggregates.
B. Compute the contribution margin ratio for Hacker Aggregates.
C. If Treva decides to spend $100,000 on advertising and the company expects the advertising to increase sales by $200,000, should the company increase the advertising? Why?