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4 December, 09:06

The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1.70 per unit. He thinks that this move, combined with some increase in advertising, would increase this year's sales by 25%. How much could the president increase this year's advertising expense and still earn the same $360,000 net operating income as last year?

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  1. 4 December, 09:26
    0
    The president must increase the advertising expense by $687, 700.

    Explanation:

    The president must increase the advertising expense by $687, 700.

    If we were to compute the income statement for the year,

    Sales would increase by 25%: $2, 280, 000 x 125% = $3, 600, 000

    Variable expenses would increase by the increase in sales commission pf $1.70 per unit:

    $1.70 x 19, 000 units = $32, 300

    Total variable expense = $1, 440, 000 + $32, 300 = $1, 472, 300

    [We arrived at 19, 000 by dividing the sales value of $2880, 000 by the selling price of $120

    $2, 880, 000 / $120 = 19, 000 units.]

    In order to determine by how much the advertising expense should increase by, we need to compute the income statement.

    Sales $3, 600, 000

    Less: Variable expenses - $1, 472, 300

    Contribution margin $2, 127, 700

    Fixed cost (given) $160, 000

    Advertising increase x

    Net operating income $1, 280, 000

    To determine the value of the advertising expense, we need to work backwards. Subtract the net operating income value and the fixed cost value from the contribution margin.

    Therefore,

    $2, 127, 700 - $1, 280, 000 - $160, 000 = $687, 700
  2. 4 December, 09:28
    0
    Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses are $40.00 per unit, fixed expenses total $200,000 per year. Its operating results for last year were as follows:

    Sales $2,160,000

    Variable expenses $1,080,000

    Contribution margin $1,080,000

    Fixed expenses $200,000

    Net operating income $ 880,000

    Answer:

    $732,625

    Explanation:

    The contribution per unit is:

    Contribution per unit = Selling price per unit - variable cost per unit - Sales commission per unit

    Contribution per unit = $80 - $40 - $1.7 = $38.3 per unit

    The increase in advertisement expense can be calculated under the new condition by the following formula:

    New Sales ($) = (Fixed cost + Profit) * Sales Prices per unit / Contribution Per unit

    By putting values we have:

    $2,160,000 * 125% = (Fixed cost + $360,000) * $80 per unit / $38.3 per unit

    $2,700,000 * $38.3 per unit / $80 per unit = Fixed Cost + $360,000

    $1,292,625 - $360,000 = Fixed Cost

    Fixed Cost = $932,625

    This means that the maximum amount of increase in the advertisement expense would be $732,625 to earn a profit of $360,000
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