Kataya Company 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) 4,012,000

Operating income $2,852,000

Part B - Question 3 continued over page

1901/110.229 Assignment 2 Booklet

Distance/Internal Manawatu/Auckland/Distance

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Part B - Question 3 continued

Required: Show all your workings.

I. Calculate the contribution margin per unit and the break-even point in units and

dollars. (For units round your answer up to the next whole unit and for $ to the

nearest dollar). (3 marks)

II. Calculate the margin of safety in dollars. (Round your answer up to the nearest

dollar). (2 marks)

III. How many units must be sold to earn an after-tax profit of $1.254 million? Assume a

tax rate of 40 per cent. (Round your answer up to the next whole unit). (6 marks)

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. (4 marks)

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.