Problem:
Icon Industries is considering a new product for its Trophy Division. The product, which would feature an alligator, is expected to have global market appeal and to become the mascot for many high school and university athletic teams. Expected variable unit costs are as follows: direct materials, $18.50; direct labor, $4.25; production supplies, $1.10; selling costs, $2.80; and other, $1.95. Annual fixed costs are depreciation, building and equipment, $36,000; advertising, $45,000; and other, $11,400. Icon Industries plans to sell the product for $55.00.
Question 1. Using the contribution margin approach, compute the number of units the company must sell to (a) break even and (b) earn a profit of $70,224.
Question 2. Using the same data, compute the number of units that must be sold to earn a profit of $139,520 if advertising costs rise by $40,000.
Question 3. Using the original information above and sales of 10,000 units, compute the selling price the company must use to make a profit of $131,600. (Hint: Calculate contribution margin per unit first.)
Question 4. According to the vice president of marketing, Albert Flora, the most optimistic annual sales estimate for the product would be 15,000 units, and the highest competitive selling price the company can charge is $52 per unit. How much more can be spent on fixed advertising costs if the selling price is $52, if the variable costs cannot be reduced, and if the targeted profit for 15,000 units sales is $251,000?