Eagle Company makes the MusicFinder, a sophisticated satellite radio. Eagle has experienced a steady growth in sales
Question:
Variable costs:
Direct labor (per unit) . . . . . . . . . . . . . . . . . . . . . . . . . $ 100.00
Direct materials (per unit) . . . . . . . . . . . . . . . . . . . . . . 45.00
Variable overhead (per unit) . . . . . . . . . . . . . . . . . . . . 20.00
Total variable costs (per unit) . . . . . . . . . . . . . . . . . $ 165.00
Fixed costs (annual):
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 400,000
Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
Administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,000
Total fixed costs (annual) . . . . . . . . . . . . . . . . . . . . . . $ 1,500,000
Selling price (per unit) . . . . . . . . . . . . . . . . . . . . . . . . $400.00
Expected sales revenues, Year 1 (25,000 units) . . . . $10,000,000
Eagle has an income tax rate of 35 percent. Ms. Luray has set the sales target for Year 2 at a level of $11,200,000 (or 28,000 radios).
Required
a. What is the projected after-tax operating profit for Year 1?
b. What is the break-even point in units for Year 1?
c. Ms. Luray believes that to attain the sales target (28,000 radios) will require additional selling expenses of $300,000 for advertising in Year 2, with all other costs remaining constant. What will be the after-tax operating profit for Year 2 if the firm spends the additional $300,000?
d. What will be the break-even point in sales dollars for Year 2 if the firm spends the additional $300,000 for advertising?
e. If the firm spends the additional $300,000 for advertising in Year 2, what is the sales level in dollars required to equal the Year 1 after-tax operating profit?
f. At a sales level of 28,000 units, what is the maximum amount the firm can spend on advertising to earn an after-tax operating profit of $750,000?
(CMA adapted)
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Related Book For
Fundamentals of Cost Accounting
ISBN: 978-0077398194
3rd Edition
Authors: William Lanen, Shannon Anderson, Michael Maher
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