Eagle Company makes the MusicFinder, a sophisticated satellite radio. Eagle has

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:

Eagle has an income tax rate of 30 percent.

Ms. Luray has set the sales target for year 2 at a level of $11,890,000 (or 29,000 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 (29,000 radios) will require additional selling expenses of $296,000 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 $296,000?

d. What will be the break-even point in sales dollars for year 2 if the firm spends the additional $296,000 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 $296,000 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 29,000 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.)

Variable costs: Direct labor (per unit) $ 94 Direct materials (per unit) 37 Variable overhead (per unit) 16 Total variable costs (per unit) $ 147 Fixed costs (annual): Manufacturing $ 386,000 Selling 291,000 Administrative 790,000 Total fixed costs (annual) $ 1,467,000 Selling price (per unit) 410 Expected sales revenues, year 1 (24,000 units) $ 9,840,000

Explanation / Answer

a) projected after tax operating profit for year1 Particulars Year 1 selling price per unit 410 less: variable cost 147 contribution per unit 263 total contribution (263*24000) 6312000 less: fixed cost 1467000 net income before tax 4845000 less: tax 30% 1453500 projected after tax operating profit 3391500 B) Break even point in units for year 1 BEP = fixed cost /contribution per unit BEP = 1467000/263 = 5578 C)Projected after tax operating profit particulars year2 total contribution (29000*263) 7627000 less: fixed cost total 1467000 advertisement 296000 net income 5864000 less: tax 30% 1759200 projected after tax operating profit for yr 2 4104800 D) Break even point = fixed cost/contribution per unit break even point = 1467000+296000/263 break even point = 6703 BEP in sales = 6703*410 = 1928230 E) Required sales = (fixed cost+profitbefore tax)/ contribution per unit required sales = 1467000+296000+4845000/263 required sales =25125 unit F) assume X be maximum amount that can be spent as advertisment required sales = (fixed cost + profit before tax)/ contribution per unit 29000 unit = (1467000+X+1082857)/263 (29000*263)-1467000-1082857=X X= 7627000-2549857 X= 5077143

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