Red Deer Sporting Goods is a retailer of sporting equipment. Last year, Red Deer’s sales revenues totalled $6,400,000. Total expenses were $2,800,000. Of this amount, approximately $1,792,000 were variable, while the remainder were fixed. Since Red Deer Sporting Goods offers thousands of different products, its managers prefer to calculate the break- even point in terms of sales dollars rather than units.
Requirements
1. What is Red Deer Sporting Goods’ current operating income (prepare a contribution margin format income statement)?
2. What is Red Deer’s contribution margin ratio?
3. What is Red Deer’s break-even point in sales dollars? (Hint:The contribution margin ratio calculated in Requirement 2 is already weighted by Red Deer Sporting Goods’ actual sales mix.) What does it mean?
4. Red Deer’s top management is deciding whether to embark on a $190,000 advertisement campaign. The marketing firm has projected annual sales volume to increase by 20% as a result of this campaign. Assuming that the projections are correct, how would this advertising campaign affect Red Deer Sporting Goods’ annual operating income?