If the firm spends the additional $293,000 for advertising in year 2, what is the sales level in dollars required to equal the year 1 after-tax operating profit

Question Completion:

Eagle Company makes the MusicFinder, a sophisticated satellite radio. Eagle has experienced a steady growth in sales for the past five years. However, Ms. Luray, Eagle's CEO, believes that to maintain the company's present growth will require an aggressive advertising campaign next year. To prepare for the campaign, the company's accountant, Mr. Bednarik, has prepared and presented to Ms. Luray the following data for the current year, Year 1:

Variable costs:

Direct labor (per unit)                $92

Direct materials (per unit)           39

Variable overhead (per unit)       15

Total variable costs (per unit) $146

Fixed costs (annual):

Manufacturing                     $386,000

Selling                                    292,000

Administrative                       796,000

Total fixed costs (annual) $1,474,000

Selling price (per unit)  $419

Expected sales revenues, Year 1 (23,000 units)$9,637,000

Eagle has an income tax rate of 30 percent.

Eagle Company

The sales level in dollars required to equal the year 1 after-tax operating profit is:

$10,086,587.

Explanation:

a) Data and Calculations:

Selling price per unit             $419

Total Variable cost per unit  $146

Contribution per unit           $273

Year 1 After-tax operating profit:

Sales revenue (23,000 * $419) = $9,637,000

Variable costs (23,000 * $146) =    3,358,000

Contribution (23,000 * $273) =   $6,279,000

Total fixed costs (annual) =           $1,474,000

Before Tax profit =                       $4,805,000

Income tax (30%) =                          1,441,500

After-Tax profit =                         $3,363,500

To produce the same after-tax profit, which is equal to $3,363,500 with the additional $293,000 for advertising in year 2, the before tax profit will also be $4,805,000.  And the new fixed costs will increase to $1,767,000 ($1,474,000 + $293,000).

Therefore, Sales unit to produce target profit of $4,805,000, equals to:

= (Fixed costs + Target profit)/Contribution margin per unit

= ($1,767,000 + $4,805,000)/$273

= 24,073 units

Sales level in dollars = 24,073 * $419 = $10,086,587

Check:

Variable cost = 3,514,658

Contribution    6,571,929

Fixed costs      1,767,000

Target profit   4,804,929 approx. = $4,805,000

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