Reference no: EM132645437

Question - R.T. Lu and Company, a manufacturing of quality handmade walnut bowls, has had a steady growth in sales for the past 5 years. However, increased competition has led Mr. Lu to believe that an aggressive marketing campaign will be necessary next year to maintain the company's present growth.

Data

Variable cost (per bowl)

Direct Material: $3.00

Direct Manufacturing Labor: $8.00

Variable Overhead (manufacturing, marketing, distribution & customer service: $4.50

Total variable cost per bowl: $15.50

Fixed costs

Manufacturing: $14,000

Marketing, distribution, and customer service: $156,500

Total fixed costs: $170,500

Selling price: $31.00

Expected sales 22,000 units

Income tax rate: 40%

Required -

1. What is the projected net income for 2017?

2. What is the break-even point in units for 2017?

3. Mr. Lu has set the revenue target for 2018 for a level of $728,500 (or 23,500 bowls). He believes an additional marketing cost of $52,700 for advertising in 2018, with all other costs remaining constant, will be necessary to attain the revenue target. What is the net income for 2018 if the additional $52,700 is spent and the revenue target is met?

4. What is the break-even point in revenues for 2018 if the additional $52,700 is spent for advertising?

5. If the additional $52,700 is spent, what are the required for 2018 net income to equal 2017 net income?

6. At a sales level of 23,500 units, what maximum amount can be spent on advertising if a 2018 net income of $84,480 is desired?