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28 November, 00:47

upino Products provides the foundational data for this problem given that the unit product costs at a normal level of 5,000 units per month and selling price of $90 are as follows: Manufacturing costs: Direct materials ... $ 35 Direct labor ... 12 Variable overhead ... 8 Fixed overhead (total for year = $300,000) ... 5 Selling and Admin costs: Variable ... $ 15 Fixed (total for year = $480,000) ... 8 This product is sold at a rate of 60,000 units per year. It is predicted that a price increase of $98 will decrease volume by 10%. An advertising campaign is proposed to support the price increase. How much can advertising expense be spent to support the price increase and without having operating income fall below the current levels?

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  1. 28 November, 01:23
    0
    Statement showing calculation of current income

    Particulars Amount

    Sales (60000x90) $5400000

    Less Material cost (60000x$35) $2100000

    Less: labour cost (60000x$12) $720000

    Less: Variable Overhead (60000x$8) $480000

    Less: Variable selling and admin Exp. (60000x$15) $900000

    Less: Fixed overhead $300000

    Less: Fixed selling and admin expenses $480000

    Net inome $420000

    Proposed increase in Selling price = $98/unit

    Resultant decrease in production = 10%X60000 = 6000 units

    Revised income = 54000 (98-35-12-8-15) - 300000 - 480000

    = $732000

    Maximum amount that can be spent on advertising so as to manitain the current level of income of $420000 is $312000 (i. e., $732000-$420000).
  2. 28 November, 04:43
    0
    Available for advertizing campaing 480,000

    Explanation:

    First we calculate the current operating income:

    sales price less all uniit operating cost

    90 - 35 - 12 - 8 - 5 - 15 - 8 = 7

    $7 x 60,000 units = $420,000 operating income

    Now we calculate the new contribution margin and operating income

    materials + labor + variable overhead + variable sale = total variable

    35 + 12 + 8 + 15 = 70

    new contribution margin per unit

    98 - 70 = 28

    sales 60,000 units less 10% = 54,000 units

    contribution margin

    28 x 54,000 = 1,512,000

    Fixed overhead 300,000

    Fixed selling and adming 480,000

    operating income 732,000

    Potential contribution from additional sales:

    6,000 units x $28 = 168,000

    Less: before raising income (420,000)

    Available for advertizing campaing 480,000
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