Limitless Labs offers three basic drug-testing services for professional athletes. The budget for the 2^nd Quarter of 2022 is shown below.

  

Variable costs include the labor costs of the medical technicians and consumable materials for testing. Fixed costs total $370,000 per year, consisting of equipment depreciation (direct fixed costs), and building depreciation and administration costs (common fixed costs). A basic “unit” is a routine test administered. A retest is given if there is concern about the results of the first test, particularly if the test indicates that the athlete tests positive for drugs that are on the banned list. Retests are not done by the laboratory that performed the basic test but instead are conducted by a different Lab in the network. A “priority” test is the laboratory’s code for a high-profile case. This might be a test of a famous athlete and/or a test that might be challenged in court. The laboratory does extra work and uses expert technicians to ensure the accuracy of priority tests. Limitless Labs is subject to a 21% tax rate.

Treat each of the following questions independently and document your work.

1. Determine the budgeted sales mix based on volume and the budgeted sales mix based on revenue.
2. Assume the actual sales mix remains the same as expected in the quarter; determine the sales revenue (in total and by product line) necessary for the lab to achieve overall breakeven ($0 after-tax profit)
3. Assume the actual sales mix remains the same as expected in the quarter; determine the sales revenue (in total and by product line) necessary for the lab to achieve $100,000 after-tax profit.
4. Limitless Labs is considering increasing its advertising for the quarter by adding $15,000 of advertising expenses. Historically, sales volume increases uniformly across the product lines by 2% for each $5,000 of additional advertising budget. Considering the impact on Operating Income, is the additional advertising worthwhile?

Testing Volume (units) Revenue Variable costs Contribution Margin Direct Fixed Costs Segment Margin Common Fixed Costs Operating income Income taxes (21%) Net Operating income Limitless Labs Budgeted Contribution Margin Analysis - Quarter 2, 2022 Basic Tests $425,000 102,000 $323,000 105.000 $218,000 850 $500 $120 $380 Retests $80,000 40,000 $40,000 35,000 $5,000 100 $800 $400 $400 Priority Tests $250,000 140.000 $110,000 50.000 $60.000 50 $5.000 $2,800 $2,200 S Total 1,000 $755,000 282,000 $473,000 190,000 $283,000 180,000 $103,000 21,630 81,370