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Question - The Central Valley Company is a manufacturing firm that produces and sells a single product. The company's revenues and expenses for the last four months are given below.
Valley Company Comparative Income Statement
March
April
May
June
Sales in units
6,400
5,900
7,350
8,800
Sales revenue
$768,000
$708,000
$882,000
$1,056,000
Less: Cost of goods sold
408,100
382,320
458,640
538,560
Gross margin
$359,900
$325,680
$423,360
$517,440
Less: Operating expenses
Shipping expense
$64,300
$53,200
$67,800
$64,000
Advertising expense
91,000
Salaries and commissions
165,000
136,000
168,500
166,500
Insurance expense
16,000
Amortization expense
49,000
Total operating expenses
$385,300
$345,200
$392,300
$386,500
Net income
$(25,400)
$ (19,520)
$31,060
$130,940
Required -
1. Management is concerned about the losses experienced during the spring and would like to know more about the cost behaviour. Develop a cost equation for each of the costs.
2. Assume that fixed costs are incurred uniformly throughout the year. Compute the annual break-even sales, and the profit if 82,000 units are sold during the year.
3. Calculate the change in profit if the selling price were reduced by $11.50 each and annual sales were to increase by 7,800 units.
4. Determine the change in profit if the company were to increase advertising by $114,000 and if this were to increase sales by 7,800 units.
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