Question

upino Products provides the foundational data for this problem given that the unit product costs at a normal level of 5,000 units per month and selling price of $90 are as follows: Manufacturing costs: Direct materials............................................... $ 35 Direct labor...................................................... 12 Variable overhead............................................ 8 Fixed overhead (total for year = $300,000)...... 5 Selling and Admin costs: Variable............................................................ $ 15 Fixed (total for year = $480,000)...................... 8 This product is sold at a rate of 60,000 units per year. It is predicted that a price increase of $98 will decrease volume by 10%. An advertising campaign is proposed to support the price increase. How much can advertising expense be spent to support the price increase and without having operating income fall below the current levels?

Answer 1

Answer:

Explanation:

Statement showing calculation of current income

Particulars                                                                            Amount

Sales (60000x90)                                                            $5400000

Less Material cost (60000x$35)                                    $2100000

Less: labour cost (60000x$12)                                        $720000

Less: Variable Overhead(60000x$8)                              $480000

Less: Variable selling and admin Exp.(60000x$15)        $900000

Less: Fixed overhead                                                       $300000

Less: Fixed selling and admin expenses                       $480000

Net inome                                                                        $420000

Proposed increase in Selling price = $98/unit

Resultant decrease in production = 10%X60000 = 6000 units

Revised income = 54000(98-35-12-8-15) - 300000 - 480000

= $732000

Maximum amount that can be spent on advertising so as to manitain the current level of income of $420000 is $312000 (i.e., $732000-$420000).

Answer 2

Answer:

Available for advertizing campaing 480,000

Explanation:

First we calculate the current operating income:

sales price less all uniit operating cost

90 - 35 - 12 - 8 - 5 - 15 - 8 = 7

$7 x 60,000 units =  $420,000 operating income

Now we calculate the new contribution margin and operating income

materials + labor + variable overhead + variable sale = total variable

35 + 12 + 8 + 15 = 70

new contribution margin per unit

98 - 70 = 28

sales 60,000 units less 10% = 54,000 units

contribution margin

28 x 54,000 =                      1,512,000

Fixed overhead                    300,000

Fixed selling and adming     480,000    

operating income                  732,000

Potential contribution from additional sales:

6,000 units x $28   =              168,000

Less: before raising income (420,000)

Available for advertizing campaing 480,000