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Management responded with the following information

* Costs have been matched to revenue to determine what costs should appear as expenses.

* The costs of goods remaining in inventory are not included in expenses.

* There are no fixed manufacturing costs.

* Cost of sales is 40% of revenue.

* $8,500 of the selling and administrative expenses are variable.

* Costs and selling prices are expected to remain stable for at least the next two years.

1.Suppose the monthly advertising costs $600. By what percentage would the advertising need to increase sales volume in order for the firm to break even? Do you think this is achievable? Explain.

2. Rather than engaging in advertising, Mollys will try to cut costs. By what amount would management need to cut fixed costs per month in order to breakeven?

3.Management believes it can cut fixed cost by $1,500 per month. It has also learned through trade association meetings that similar stores have variable selling and administrative expenses of 12% of revenue. If management is able to cut fixed cost by $1,500 and bring selling and administrative expenses in line with other stores, will it at least break even? Support your answer with evidence.

4.Examine your responses to questions 4, 5 and 6. Which would you recommend to Molly Management: increase volume through advertising, or cost control? Explain.

5. Ignore the advertising and cost cutting. Compute the amount of revenue that Mollys would need in order to show a $1,500 profit. If Molly's was operating at this target profit level, what would be its margin of safety(dollars and percentage)?

Management's Issue: Molly's Cupcakes management is trying to decide whether to stay in business. They are currently losing money and want to know how close they are to making a profit and whether they should invest in advertising. Molly's provided the following information related to their monthly operations: Revenue $34,000 Less: Expenses 37,100 Profit(loss) $3,100)

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