R. A. Ro and Company, a manufacturer of quality handmade walnut bowls, has experienced a steady growth in sales for the past five years. However, increased competition has led Mr. Ro, 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. Ro with the following data for the current year, 2013:

Variable costs (per bowl):

Direct manufacturing labour............... $ 9.60

Direct materials.................. 3.90

Variable overhead (manufacturing, marketing,

distribution, customer service, and administration).... 3.00

Total variable costs................. $ 16.50

Fixed costs:

Manufacturing .................. $30,000

Marketing, distribution, and customer service...... 48,000

Administrative .................... 84,000

Total fixed costs..................$162,000

Selling price per bowl .................. $30.00

Expected revenues, 2013 (20,000 units)........$600,000

Income tax rate.................. 40%

REQUIRED

1. What is the projected net income for 2013?

2. What is the breakeven point in units for 2013?

3. Mr. Ro has set the revenue target for 2014 at a level of $660,000 (or 22,000 bowls). He believes an additional marketing cost of $13,500 for advertising in 2014, with all other costs remaining constant, will be necessary to attain the revenue target. What will be the net income for 2014 if the additional $13,500 is spent and the revenue target is met?

4. What will be the breakeven point in revenues for 2014 if the additional $13,500 is spent for advertising?

5. If the additional $13,500 is spent for advertising in 2014, what is the required 2014 revenue for 2014’s net income to equal 2013’s net income?

6. At a sales level of 22,000 units, what maximum amount can be spent on advertising if a

2014 net income of $72,000 is desired?