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Question: The Brownout Enthusiasts Company, maker of high-quality flashlights, has experienced a steady growth over the last 6 years. However, increased competition has led Mr. Darkknight, the president, to believe that an aggressive campaign is needed next year to maintain the company's present growth. The company's accountant has presented Mr. Darkknight with the following data for the current year, 2016, for the use in preparing next year's advertising campaign. Cost Schedules Variable Costs Direct labor per flashlight - 8.00 Direct matrials - 4.00 Variable overhead - 3.00 Total Variable cost per flashlight - 15.00 Fixed costs Manufacturing 25,000 Selling 40,000 Administrative 70,000 Total fixed costs 135,000 Selling price per flashlight - 25.00 Sales, 2016 (20,000 flashlights) - 500,000 Mr. Darkknight has set the sales target for 2017 at a level of P 550,000 (22,000 flashlights). Required: (Ignore any income tax considerations) a) What is the operating income for 2016? b) What is the breakeven point in units for 2016? c) Mr. Darkknight believes that to attain the sales target in 2017, the company must incur an additional selling expense of P 10,000 for advertising in 2017, with all other costs remaining constant. What will be the breakeven point in sales pesos for 2017 if the company spends the additional P 10,000?
a) Operating income for 2016: Revenue = 500,000 Variable costs = (15.00 x 20,000) = 300,000 Contribution Margin = 200,000 Fixed costs = 135,000 Operating Income = 65,000 b) Breakeven point in units for 2016: Fixed Costs = 135,000 Contribution Margin (Selling Price 25.00 – Variable costs 15.00) = 10.00 Breakeven Point = 135,000 / 10.00 = 13,500 units c) Breakeven point in sales pesos for 2017: Fixed costs = 135,000 + 10,000 = 145,000 Contribution Margin (25.00 – 15.00) = 10.00 Breakeven Point = 145,000 / 10.00 = 14,500 units Breakeven Point (in sales pesos) = 14,500 x 25.00 = 362,500
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