Question
Gosford Rocks Ltd mines and distributes sandstone. Most of the companys sandstone is sold to contractors who use the product when constructing luxury houses. Carly,
Gosford Rocks Ltd mines and distributes sandstone. Most of the companys sandstone is sold to contractors who use the product when constructing luxury houses. Carly, company CEO, believes the company needs to advertise to increase sales. She has proposed a plan to the other managers that Gosford Rocks spend $300000 on a targeted advertising campaign. The company currently sells 50 000 tonnes of sandstone for total revenue of $10000000. Other data related to the companys production and operational costs follow:
Direct labour | $3 000 000 |
Variable production overhead | 400 000 |
Fixed production overhead | 700 000 |
Selling and administrative expenses: | |
Variable | 100 000 |
Fixed | 600 000 |
REQUIRED:
a) Compute the break-even point in units (i.e. tonnes) for Gosford Rocks.
b) Compute the contribution margin ratio for Gosford Rocks.
c) If Carly decides to spend $300000 on advertising and the company expects the advertising to increase sales by $600000, should the company increase the advertising? Why or why not?
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