Company that makes a popular brand of basketball shoes
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You are the plant accountant for a company that makes a popular brand of basketball shoes. Currently, your company sells 1,000 pairs of shoes each month for $100 apiece. The variable costs are 40% of sales, and the fixed costs are $35,000/month. The company’s advertising director is asking for an increase in her marketing budget of $1,500 per month. She plans to enhance her marketing campaign in a targeted area of the West Coast. She estimates that the additional advertising will result in a 50% increase in demand. For this situation, the additional advertising costs are considered a fixed cost. What is the impact of this request on the company’s operating income? On the other hand, the production manager believes that this increase in sales could put pressure on the production line. He estimates that there will need to be a $2.00 increase in labor costs per unit.
Consider the following:
• Using the projected monthly income figure calculated above, how many units would the company need to sell to meet the initial monthly income figure?
• What is the break-even sales volume needed?
• Summarize the results of your analysis.
Respond to the following for this assignment:
• How did you calculate the original operating income and break-even point before changes?
• What is the new break-even point after including the effects of the increased advertising and higher variable costs?
• Compare the two break-even results, and make a recommendation on whether the company should change or not.
Follow the template included in the additional file for this assignment.
If references are needed please use references that are in English.
Be sure to show your breakeven analysis in a table in a word document. Answer the questions above as part of your analysis. The assignment is 5 pages minimum. The breakeven analysis can be one page of the analysis. Assignments should follow APA formatting requirements.
Submitting your assignment in APA format means, at a minimum, you will need the following:
• Title page: Remember the running head. The title should be in all capitals.
• Length: 5 pages minimum
• Abstract: This is a summary of your paper, not an introduction. Begin writing in third person.
• Body: This begins on the page following the title page and abstract page and must be double-spaced (be careful not to triple- or quadruple-space between paragraphs). The typeface should be 12-pt. Times Roman or 12-pt. Courier in regular black type. Do not use color, bold type, or italics, except as required for APA-level headings and references. The deliverable length of the body of your paper for this assignment is 5 pages. In-body academic citations to support your decisions and analysis are required. A variety of academic sources is encouraged.
• Reference page: References that align with your in-body academic sources are listed on the final page of your paper. The references must be in APA format using appropriate spacing, hanging indent, italics, and uppercase and lowercase usage as appropriate for the type of resource used. Remember, the Reference page is not a bibliography but a further listing of the abbreviated in-body citations used in the paper. Every referenced item must have a corresponding in-body citation.
Sample Solution
The original operating income before changes was calculated by subtracting the total variable costs (40% of sales) and fixed costs ($35,000/month) from the monthly income. Thus, the original operating income is:
Operating Income = Sales – Variable Costs – Fixed Costs
= $100,000 – $40,000 – $35,000
= $25,000.
To meet this initial monthly income figure without any changes, the company would need to sell 1,250 pairs of shoes per month ($125K in sales with 40% variable cost). This is 250 more than what it currently sells.
When including the effects of the increased advertising and higher variable costs (42%), we can calculate a new breakeven point as follows: Breakeven Point = Total Fixed Cost/(1-Variable Cost %)= $37,500 /(1-0.42)=$65K in sales. To reach this number of sales at a price of $100 per pair of shoes and with 42% variable cost ratio would require 1120 units for sale each month (1120 * 100 = 112K; 112K * 0.42 = 47.2k; 65k – 47k2= 18K Fix cost).
In summary, if your company were to increase its marketing budget by an additional $1500/month and expected a 50% increase in demand then there will be an impact on their operating income due to increased fixed costs caused by advertising as well as higher variable costs caused by labor increases for production which will result in a break even point at 65K in sales requiring 1120 units sold each month to maintain profit levels equal to before changes were made.
