Reference no: EM133093483
Question - H. Gaston & Sons, manufacturer of quality handmade walnut bowls, has had a steady growth in sales for the past five years. However, increased competition has led Mr. Gaston, the president, to believe that an aggressive marketing campaign will be necessary next year to maintain the company's present growth. To prepare for next year's marketing campaign, the company's controller has prepared and presented Mr. Gaston with the following data for the current year, 2021:
Variable cost (per bowl)
Direct materials P3.25
Direct labor 8.00
Variable overhead (manufacturing, marketing, distribution, and customer service) 2.50
Total variable cost per bowl P13.75
Fixed costs
Manufacturing P25,000
Marketing, distribution, and customer service 110,000
Total fixed costs P135,000
Selling price P25.00
Expected sales, 20,000 units P500,000
Income tax rate 40%
Mr. Gaston has set the revenue target for 2022 at a level of P550,000 (or 22,000 bowls). He believes an additional marketing cost of P11,250 for advertising in 2022, with all other costs remaining constant, will be necessary to attain the revenue target.
Based on the information above, answer the following:
1. If the additional P11,250 is spent, what are the required 2022 revenues for 2022 net income to equal 2021 net income?
2. At a sales level of 22,000 units, what maximum amount can be spent on advertising if a 2022 net income of P60,000 is desired?