Reference no: EM132518756

ABC Hotel Limited ("ABCHL") operates a small store selling spa oil. ABCHL sells each unit for $80. Variable costs per unit equal $40. Total fixed costs equal $460,000. ABCHL is currently selling 12,000 units per period. The management would like to earn net income of $80,000.

ABCHL considers whether a promotion campaign to be carried out in next year. The cost of the promotion campaign is $100,000. The expected increase in unit of sales is 20% and 30% if the selling price is $80 and $72 respectively.

Required:

Question (a) Compute:

(i) Contribution margin per unit in dollars.

(ii) Contribution margin percentage.

(iii) Break-even point in dollars.

(iv) Break-even in units.

(v) Sales units necessary to attain desired income of $80,000.

(vi) Margin of safety ratio for current operations.

Question (b) Should ABCHL carry out the promotion campaign in next year. Justify your answer by showing all relevant calculations.

Question 2(a) What are the key factors on which external financing depends, as indicated in the AFN (Additional Funds Needed) equation?

Question (b) How should a firm determine its capital structure weights for the estimation/calculation of the WACC (weighted average cost of capital)?