Chapter 7, Problem 7.33AE

Breakeven and an advertising decision at a multiproduct company (Learning Objectives 3 & 4)

Wellington Medical Supply is a retailer of home medical equipment. Last year, Wellington’s sales revenues totaled $6,300,000. Total expenses were $2,200,000. Of this amount, approximately $1,260,000 were variable, while the remainder were fixed. Since Wellington’s offers thousands of different products, its managers prefer to calculate the breakeven point in terms of sales dollars rather than units.

Requirements

1. 1. What is Wellington’s current operating income?
2. 2. What is Wellington s contribution margin ratio?
3. 3. What is the company’s breakeven point in sales dollars? (Hint. The contribution margin ratio calculated in Requirement 2 is already weighted by the company’s actual sales mix.)
4. 4. Wellington’s top management is deciding whether to embark on a $190,000 advertising campaign. The marketing firm has projected annual sales volume to increase by 10% as a result of this campaign. Assuming that the projections are correct, what effect would this advertising campaign have on the company’s annual operating income?