WONDER Ltd maker of quality pens has experienced a steady growth in sales for the past five years. However, increased competition has led the Managing Director of WONDER Ltd to believe that an aggressive advertising campaign will be necessary next year to maintain the company’s present growth. To prepare for next advertising campaign, the company’s accountant has prepared and presented to the Managing Director the following data for the current year 2020. COST SCHEDULE Variable cost per pen: £ Direct labour 8.00 Direct material 3.25 Variable overhead 2.50 Total Variable Costs 13.75 Fixed Cost: Manufacturing 25,000 Selling 40,000 Administrative 70,000 Total Fixed Costs 135,000 Selling price £25 Expected sales 2020 (20,000units) ........ £500,000 Tax Rate 20% The Managing Director has set a target for 2021 at a level of £550,000 (or 22,000 pens) question: If the additional £11,250 is spent on advertising in 2020, what is the required sales level in pound sales to equal 2020 after-tax net income? At a sales level 22,000 units, what maximum amount can be spent on advertising if an after-tax net income of £60,000 is desired?
WONDER Ltd maker of quality pens has experienced a steady growth in sales for the
past five years. However, increased competition has led the Managing Director of
WONDER Ltd to believe that an aggressive advertising campaign will be necessary next
year to maintain the company’s present growth.
To prepare for next advertising campaign, the company’s accountant has prepared and
presented to the Managing Director the following data for the current year 2020.
COST SCHEDULE
Variable cost per pen: £
Direct labour 8.00
Direct material 3.25
Variable
Total Variable Costs 13.75
Fixed Cost:
Manufacturing 25,000
Selling 40,000
Administrative 70,000
Total Fixed Costs 135,000
Selling price £25
Expected sales 2020 (20,000units) ........ £500,000
Tax Rate 20%
The Managing Director has set a target for 2021 at a level of £550,000 (or 22,000 pens)
question:
If the additional £11,250 is spent on advertising in 2020, what is the required
sales level in pound sales to equal 2020 after-tax net income?
At a sales level 22,000 units, what maximum amount can be spent on
advertising if an after-tax net income of £60,000 is desired?
As a part of analysis for decision-making, revenue and cost are compared for the different alternatives and the most profitable option is selected.
Note:
Note - For Advertisement Exp, as the expense details are not clearly mentioned if its variable cost or fixed cost. So the additional expense on advertisement is considered as a fixed cost as part of selling expense.
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