Eagle Company makes the MusicFinder, a sophisticated satellite radio. Eagle has
ID: 2333734 • Letter: E
Question
Eagle Company makes the MusicFinder, a sophisticated satellite radio. Eagle has experienced a steady growth in sales for the past five years. However, Ms. Luray, Eagle's CEO, believes that to maintain the company's present growth will require an aggressive advertising campaign next year. To prepare for the campaign, the company's accountant, Mr. Bednarik, has prepared and presented to Ms. Luray the following data for the current year, year 1: Variable costs: Direct labor (per unit) $ 100 Direct materials (per unit) 37 Variable overhead (per unit) 19 Total variable costs (per unit) $ 156 Fixed costs (annual): Manufacturing $ 388,000 Selling 286,000 Administrative 792,000 Total fixed costs (annual) $ 1,466,000 Selling price (per unit) 403 Expected sales revenues, year 1 (27,000 units) $ 10,881,000 Eagle has an income tax rate of 30 percent. Ms. Luray has set the sales target for year 2 at a level of $12,090,000 (or 30,000 radios). Required: a. What is the projected after-tax operating profit for year 1? b. What is the break-even point in units for year 1? (Round up your answer to the nearest whole number.) c. Ms. Luray believes that to attain the sales target (30,000 radios) will require additional selling expenses of $294,000 for advertising in year 2, with all other costs remaining constant. What will be the after-tax operating profit for year 2 if the firm spends the additional $294,000? d. What will be the break-even point in sales dollars for year 2 if the firm spends the additional $294,000 for advertising? (Solve by computing volume in units first. Round up units to the nearest whole number and round your final answer to the nearest whole dollar amount.) e. If the firm spends the additional $294,000 for advertising in year 2, what is the sales level in dollars required to equal the year 1 after-tax operating profit? (Solve by computing volume in units first. Round up units to the nearest whole number and round your final answer to the nearest whole dollar amount.) f. At a sales level of 30,000 units, what is the maximum amount the firm can spend on advertising to earn an after-tax operating profit of $758,000? (Round intermediate calculations and final answer to the nearest whole dollar amount.)
Explanation / Answer
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a. What is the projected after-tax operating profit for year 1? Units Rate Amount sales revenue 27000 $ 403.00 $ 10,881,000 Variable cost 27000 $ 156.00 4,212,000 Contribution Margin 27000 $ 247.00 6,669,000 Fixed Cost 1,466,000 Operating Profit 5,203,000 Less: tax at 30% 1,560,900 After tax op. Profit $ 3,642,100 b. What is the break-even point in units for year 1? (Round up your answer to the nearest whole number.) BEP in units = Fixed Cost/ Contribution margin pu 1466000/247 5,935 Units c. Ms. Luray believes that to attain the sales target (30,000 radios) will require additional selling expenses of $294,000 for advertising in year 2, with all other costs remaining constant. What will be the after-tax operating profit for year 2 if the firm spends the additional $294,000? Units Rate Amount Contribution margin 30000 $ 247.00 $ 7,410,000 Less: Fixed cost 1,760,000 (1466000+294000) Operating Profit 5,650,000 Less: tax at 30% 1,695,000 After tax op. Profit $ 3,955,000 d. What will be the break-even point in sales dollars for year 2 if the firm spends the additional $294,000 for advertising? (Solve by computing volume in units first. Round up units to the nearest whole number and round your final answer to the nearest whole dollar amount.) BEP in units = Fixed Cost/ Contribution margin pu 1760000/247 7,126 Units BEP in $ = 7126 x $403 $ 2,871,778 e. If the firm spends the additional $294,000 for advertising in year 2, what is the sales level in dollars required to equal the year 1 after-tax operating profit? (Solve by computing volume in units first. Round up units to the nearest whole number and round your final answer to the nearest whole dollar amount.) BEP in units with profit = FC + Profit / Contribution margin pu (1760000+5203000)/247 28,190 Units BEP in $ with profit = 28190 x 403 $ 11,360,570 f. At a sales level of 30,000 units, what is the maximum amount the firm can spend on advertising to earn an after-tax operating profit of $758,000? (Round intermediate calculations and final answer to the nearest whole dollar amount.) Operating profit before tax $ 1,082,857 (758000/70%) Contribution margin $ 7,410,000 Less: fixed cost old 1466000 OP profit before advert. $ 5,944,000 Op. profit after advert. $ 1,082,857 Maximum amount of advert $ 4,861,143 AnsRelated Questions
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