question archive ABC Company Projected Income Statement For the Current Year Ending December 31 Sales (4,000 units)   $400,000 Less variable costs:       Variable manufacturing costs $100,000     Variable selling costs   60,000       Total variable costs       160,000 Contribution margin   $240,000 Less fixed costs:       Fixed manufacturing costs $120,000     Fixed selling and administrative costs   60,000       Total fixed costs     180,000 Operating income   $ 60,000 Required: A

ABC Company Projected Income Statement For the Current Year Ending December 31 Sales (4,000 units)   $400,000 Less variable costs:       Variable manufacturing costs $100,000     Variable selling costs   60,000       Total variable costs       160,000 Contribution margin   $240,000 Less fixed costs:       Fixed manufacturing costs $120,000     Fixed selling and administrative costs   60,000       Total fixed costs     180,000 Operating income   $ 60,000 Required: A

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ABC Company

Projected Income Statement

For the Current Year Ending December 31

Sales (4,000 units)

 

$400,000

Less variable costs:

   
 

Variable manufacturing costs

$100,000

 
 

Variable selling costs

  60,000

 
   

Total variable costs

 

    160,000

Contribution margin

 

$240,000

Less fixed costs:

   
 

Fixed manufacturing costs

$120,000

 
 

Fixed selling and administrative costs

  60,000

 
   

Total fixed costs

 

  180,000

Operating income

 

$ 60,000

Required:

A.

Determine the break-even point in sales dollars.

B.

The sales manager believed the company could increase sales by 1,000 units if advertising expenditures were increased by $25,000. By how much will operating income increase or decrease if the advertising is increased as suggested?

 

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Answer:

A. Calculation of break-even point in sales dollars

Break-even point in sales dollars = Fixed Cost / Contribution Margin Ratio

=  $ 1,80,000 / 60 %

   = $ 3,00,000

Contribution margin ratio  = Contribution Margin / Total Sales *100

   = $ 2,40,000 / $ 4,00,000 * 100

= 60%

B.

Increase (Decrease) in net operating income = (Increase in sales * Contribution margin ratio) - Increase in advertising budget

=  ( $1,00,000 * 60% ) - $25,000

   = $ 35,000

If Advertising expenditure increased by $ 25000 then it will result in increase in net operating income by $ 35,000

Increase in sales = 1000 Units * $ 100 per Unit

= $ 1,00,000