Assume the West region invests $43,000 in a new advertising campaign in Year 2 t

Question

Assume the West region invests $43,000 in a new advertising campaign in Year 2 that increases its unit sales by 20%. If all else remains constant, what would be the profit impact of pursuing the advertising

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The summary to this question is below

Diego Company manufactures one product that is sold for $70 per unit in two geographic regions—the East and West regions. The following information pertains to the company’s first year of operations in which it produced 53,000 units and sold 48,000 units.

  

  

The company sold 36,000 units in the East region and 12,000 units in the West region. It determined that $270,000 of its fixed selling and administrative expenses is traceable to the West region, $220,000 is traceable to the East region, and the remaining $67,000 is a common fixed cost. The company will continue to incur the total amount of its fixed manufacturing overhead costs as long as it continues to produce any amount of its only product.

   

campaign?

    

15.

Assume the West region invests $43,000 in a new advertising campaign in Year 2 that increases its unit sales by 20%. If all else remains constant, what would be the profit impact of pursuing the advertising

[The following information applies to the questions displayed below.]

The summary to this question is below

Diego Company manufactures one product that is sold for $70 per unit in two geographic regions—the East and West regions. The following information pertains to the company’s first year of operations in which it produced 53,000 units and sold 48,000 units.

  

  Variable costs per unit:      Manufacturing:         Direct materials $ 21            Direct labor $ 10            Variable manufacturing overhead $ 2            Variable selling and administrative $ 4      Fixed costs per year:      Fixed manufacturing overhead $ 1,060,000         Fixed selling and administrative expenses $ 557,000   

  

The company sold 36,000 units in the East region and 12,000 units in the West region. It determined that $270,000 of its fixed selling and administrative expenses is traceable to the West region, $220,000 is traceable to the East region, and the remaining $67,000 is a common fixed cost. The company will continue to incur the total amount of its fixed manufacturing overhead costs as long as it continues to produce any amount of its only product.

   

campaign?

Explanation / Answer

Incremental revenue due to increse in units = 12000 x 20% x 70

= 168000

Cost of advertising = 43000

Incremental selling and adminstrative expenses = 4 x 2400 = 9600

Incremental profit = 168000 - 43000 -9600

= $115400

Thus profit will increase by $115400

Note: Since the company has already manufactured more than 48000 units i.e 53000 units therefore no further manufacturing cost will be incurred on 2400 units.

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