Question

Jane Westerlund owns a picture-framing store, The Caplow Co. The average price she receives for a framed picture is $120. This price must cover her costs for a typical framed picture, which consists of $5 for glass, $2 for matting, $13 for the frame, and $30 for the labor involved. She must also cover monthly expenses of $1,000 for rent and insurance, $200 for heat and electricity, $500 for advertising, and $3,500 for her salary. Assuming there is no change in price or the quantity demanded, if Westerlund wants to increase her advertising expenses to a total of $1,000 (a $500 increase), this would cause total costs to __________ and the break-even quantity to __________.

Answer 1

Answer:

Assuming there is no change in price or the quantity demanded, if Westerlund wants to increase her advertising expenses to a total of $1,000 (a $500 increase), this would cause total costs to INCREASE and the break-even quantity to INCREASE.

Explanation:

total variable costs per unit = $5 (glass) + $2 (mating) + $13 (frame) + $30 (labor) = $50 per frame

total fixed costs = $1,000 (rent) + $200 (utilities) + $500 (advertising) + $3,500 (manager's salary) = $5,200

sales price = $120 per frame

contribution margin = $120 - $50 = $70 per frame

current break even point = $5,200 / $70 = 74.29 ≈ 75 frames per month

if fixed costs increase by $500 (total fixed costs = $5,200 + $500 = $5,700)

the new break even point = $5,700 / $70 = 81.43 ≈ 82 frames per month

Answer 2

Answer:

this would cause total costs to Increase and the break-even quantity to Increase.

Explanation:

Total Cost is the Sum of All Manufacturing and Non-Manufacturing  Cost of a product.

Advertising expense before adjustments are at $500. The cost of advertising does not vary with the sales quantities therefore this is a fixed cost.

Therefore an Increase in the advertising expense causes an increase in Total cost figure.

Break even quantity is a function of Fixed Costs divided by Contribution per unit.The break even quantity will definitely change. By increasing the fixed costs (Advertising Expense), the Break even quantity will increase.