3-41 (similar to) Question Help R.T.R.T. WuWu and Company, a manufacturer of qua

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3-41 (similar to)

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R.T.R.T.

WuWu and Company, a manufacturer of quality handmade walnut bowls, has had a steady growth in sales for the past 5 years. However, increased competition has led Mr. WuWu,

the president, to believe that an aggressive marketing campaign will be necessary next year to maintain the company's present growth. To prepare for nextyear's marketing campaign, the company's controller has prepared and presented Mr. WuWu with the following data for the current year, 2017:

Variable cost (per bowl)

Direct materials

$3.50

Direct manufacturing labor

7.50

Variable overhead (manufacturing, marketing, distribution and customer service)

4.50

Total variable cost per bowl

$15.50

Fixed costs

Manufacturing

$14,000

Marketing, distribution, and customer service

156,500

Total fixed costs

$170,500

Selling price

$31.00

Expected sales, 22,000 units

$682,000

Income tax rate

40%

1.

What is the projected net income for 2017?

2.

What is the breakeven point in units for 2017?

3.

Mr. WuWu has set the revenue target for 2018 at a level of $728,500

(or 23,500 bowls). He believes an additional marketing cost of

$52,700 for advertising in 2018, with all other costs remaining constant, will be necessary to attain the revenue target. What is the net income for 2018 if the additional $52,700 is spent and the revenue target is met?

4.

What is the breakeven point in revenues for 2018 if the additional $52,700

is spent foradvertising?

5.

If the additional $52,700 is spent, what are the required

2018 revenues for 2018 net income to equal 2017 net income?

6.

At a sales level of 23,500 units, what maximum amount can be spent on advertising if a 2018 net income of $84,480 is desired?

3-41 (similar to)

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Explanation / Answer

1) Units = 22000 Per unit Amount Sales $31.00 $682,000.00 Variable cost (per bowl) Direct materials $3.50 $77,000.00 Direct Manufacturing labor $7.50 $165,000.00 Variable overhead (manufacturing, marketing, distribution, and customer services) $4.50 $99,000.00 Total variable cost per bowl $15.50 $341,000.00 Contribution Margin $15.50 $341,000.00 Fixed costs Manufacturing $14,000.00 Marketing, distribution, and customer service $156,500.00 Total fixed costs $170,500.00 EBIT $170,500.00 Less: Tax 40% $68,200.00 Net Income $102,300.00 2) BEP units = Fixed Cost/ SP - VP BEP units = 170,500/ $31 - $15.50 11000.00 units 3) Units = 23500 Per unit Amount Sales $31.00 $728,500.00 Variable cost (per bowl) Direct materials $3.50 $82,250.00 Direct Manufacturing labor $7.50 $176,250.00 Variable overhead (manufacturing, marketing, distribution, and customer services) $4.50 $105,750.00 Total variable cost per bowl $15.50 $364,250.00 Contribution Margin $15.50 $364,250.00 Fixed costs Manufacturing $14,000.00 Marketing, distribution, and customer service $209,200.00 Total fixed costs $223,200.00 EBIT $141,050.00 Less: Tax 40% $56,420.00 Net Income $84,630.00 4) BEP units = Fixed Cost/ SP - VP BEP units = 209,200/ $31 - $15.50 14400.00 units 5) BEP Units = $223,200 + $102,300/($31 - $15.50) 21000.00 Units Required Revenue = 21000 x $31 $651,000.00 6) Net income = .6(OI) $84,480 = .6(OI) OI = 84480/.6 $140,800.00 Sales = TVC + TFC + OI $728,500 = $364250 + TFC + $140800 TFC = 728500 - 364250 - 140800 $223,450.00 Advertisement = $223,450 - $223,200 $250.00 Maximum amt = $250 + 156500 $156,750.00

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