Diving Wear Ltd makes neoprene wetsuits. The company’s projected income statement for the coming year is as follows: Sales (65,000 units) $15,600,000 Less: Variable costs 8,736,000 Contribution margin 6,864,000 Less: Fixed costs (incl. advertising) 4,011,744 Operating income $2,852,256 Required: (iv) Suppose actual sales revenue exceed the estimated amount on the projected income statement by $612,000. Without preparing a new income statement, determine the amount by which the profits are underestimated. (v) The company’s management has decided to increase the advertising budget by $140,000 and reduce the average selling price to $200. These actions will increase sales revenues by $1 million. Will this improve the company’s financial situation? Prepare a new income statement to support your answer.

Diving Wear Ltd makes neoprene wetsuits. The company’s projected income statement for the coming year is as follows: Sales (65,000 units) $15,600,000 Less: Variable costs 8,736,000 Contribution margin 6,864,000 Less: Fixed costs (incl. advertising) 4,011,744 Operating income $2,852,256 Required: (iv) Suppose actual sales revenue exceed the estimated amount on the projected income statement by $612,000. Without preparing a new income statement, determine the amount by which the profits are underestimated. (v) The company’s management has decided to increase the advertising budget by $140,000 and reduce the average selling price to $200. These actions will increase sales revenues by $1 million. Will this improve the company’s financial situation? Prepare a new income statement to support your answer.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter16: Cost-volume-profit Analysis

Section: Chapter Questions

Problem 36P: Faldo Company produces a single product. The projected income statement for the coming year, based...

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[The following information applies to the questions displayed below.] Data for Hermann Corporation are shown below: Selling price Variable expenses Contribution margin Fixed expenses are $85,000 per month and the company is selling 2,700 units per month. Req 2A Per Unit 125 80 $45 2-a. Refer to the original data. How much will net operating income increase (decrease) per month if the company uses higher-quality components that increase the variable expense by $5 per unit and increase unit sales by 20%. 2-b. Should the higher-quality components be used? Req 2B Complete this question by entering your answers in the tabs below. Percent of Sales Net operating income 100% 64 36% by Refer to the original data. How much will net operating income increase (decrease) per month if the company uses higher- quality components that increase the variable expense by $5 per unit and increase unit sales by 20%. Req 2A Req 2B >