Eagle Company makes the MusicFinder, a sophisticated satelliteradio. Eagle has experienced a steady growth in sales for the pastfive years. However, Ms. Luray, Eagle's CEO, believes that tomaintain the company's present growth will require an aggressiveadvertising campaign next year. To prepare for the campaign, thecompany's accountant, Mr. Bednarik, has prepared and presented toMs. Luray the following data for the current year, year 1:
| | |
| Variable costs: | | |
| Direct labor (per unit) | $ | 94 |
| Direct materials (per unit) | | 37 |
| Variable overhead (perunit) | | 16 |
| Total variable costs (perunit) | $ | 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 |
|
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 operatingprofit for year 1?
b. What is the break-even point in units foryear 1? (Round up your answer to the nearest wholenumber.)
c. Ms. Luray believes that to attain the salestarget (29,000 radios) will require additional selling expenses of$296,000 for advertising in year 2, with all other costs remainingconstant. What will be the after-tax operating profit for year 2 ifthe firm spends the additional $296,000?
d. What will be the break-even point in salesdollars for year 2 if the firm spends the additional $296,000 foradvertising? (Solve by computing volume in units first.Round up units to the nearest whole number and round your finalanswer to the nearest whole dollar amount.)
e. If the firm spends the additional $296,000for advertising in year 2, what is the sales level in dollarsrequired to equal the year 1 after-tax operating profit?(Solve by computing volume in units first. Round up unitsto the nearest whole number and round your final answer to thenearest whole dollar amount.)
f. At a sales level of 29,000 units, what isthe maximum amount the firm can spend on advertising to earn anafter-tax operating profit of $758,000? (Round intermediatecalculations and final answer to the nearest whole dollaramount.)
