Zimmerman Company records the following costs associated with the production and sale of a steel slingshot:

Selling expenses:

Fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,000

Variable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.50 per unit sold

Administrative expenses:

Fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$4,500

Variable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.25 per unit sold

Manufacturing costs:

Fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $35,000

Variable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$7.50 per unit produced

Required:

Assume that in 2012 the beginning and ending inventories were the same. Also assume that 2012 sales were 25,000 units at $11 per slingshot.

1. Prepare a contribution margin income statement.

2. Determine the break-even point in sales dollars.

3. Interpretive Question: Zimmerman believes that sales volume could be improved 20% if an additional commission of $0.50 per unit were paid to the salespeople. Zimmerman also believes, however, that the same percentage increase could be achieved through an increase of $3,000 in annual advertising expense. Which action, if either, should Zimmerman take? Why?