Question

J. T. Lu and Company, a manufacturer of quality handmade walnut bowls, has had a steady growth in sales for the past 5 years. However, increased competition has led Mr. Lu, the president, to believe that an aggressive marketing campaign will be necessary next year to maintain the company’s present growth. To prepare for next year’s marketing campaign, the company’s controller has prepared and presented Mr. Lu with the following data for the current year, 2012:
Variable cost (per bowl)
Direct materials.......................... $ 3.75
Direct manufacturing labor ....................... 8.50
Variable overhead (manufacturing, marketing, distribution, and customer service).. 1.25
Total variable cost per bowl ...................... $ 13.50
Fixed costs
Manufacturing .......................... $ 14,000
Marketing, distribution, and customer service ............ 133,000
Total fixed costs ....................... $ 147,000
Selling price ......................... 24.00
Expected sales, 20,000 units ................ $ 480,000
Income tax rate......................... 40%

Required
1. What is the projected net income for 2012?
2. What is the breakeven point in units for 2012?
3. Mr. Lu has set the revenue target for 2013 at a level of $ 540,000 (or 22,500 bowls). He believes an additional marketing cost of $ 10,500 for advertising in 2013, with all other costs remaining constant, will be necessary to attain the revenue target. What is the net income for 2013 if the additional $ 10,500 is spent and the revenue target is met?
4. What is the breakeven point in revenues for 2013 if the additional $ 10,500 is spent for advertising?
5. If the additional $ 10,500 is spent, what are the required 2013 revenues for 2013 net income to equal 2012 net income?
6. At a sales level of 22,500 units, what maximum amount can be spent on advertising if a 2013 net income of $ 47,100 is desired?



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  • CreatedJanuary 15, 2015
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