Assignment
Red Rock, Inc. mines and distributes various types of rocks. Most of the company's rock is sold to contractors who use the product in highway construction projects. Aracely Hudson, company president, believes that the company needs to advertise to increase sales. She has proposed a plan to the other managers that Red Rock, Inc. spend $107,000 on a targeted advertising campaign. The company currently sells 28,000 tons of aggregate for total revenue of $5,150,000. Other data related to the company's production and operational costs follow:
Direct labor $1,400,000
Variable production overhead 200,000
Fixed production overhead 350,000
Selling and administrative expenses:
Variable 51,000
Fixed 299,000
Required:
A. Compute the break-even point in units (i.e., tons) for Red Rock, Inc. If required, round interim calculations to 2 decimal places, use your rounded number in subsequent calculations, and round your answer to nearest whole number.
B. Compute the contribution margin ratio for Red Rock, Inc. Round your answer to two decimal places. Ensure that answer is entered in decimals and not in percentages.
C. If Aracely decides to spend $100,000 on advertising and the company expects the advertising to increase sales by $200,000, should the company increase the advertising?
If the company increases the advertising, the contribution margin will INCREASE by$_______ and net income will INCREASE by $___________.
Partially Correct
Check My Work Feedback
A) BE (units) = fixed costs divided by contribution margin per unit. Contribution margin is the difference between sales and variable costs. Calculate CM/ton.
Sales - variable costs (DL+VOH+VS&A) = CM. Divide CM by units = CM/ton.
B) Contribution margin ratio is calculated by dividing the contribution margin in dollars by sales in dollars.
C) (1) Prepare both income statements side by side for proposed changes.
(2) Compute additional profit using contribution margin ratio x sales and compare to additional costs.