Multiple-Product Analysis, Changes in Sales Mix, Sales to Earn Target Operating Income

Kenno Company produces two products: squares and circles. The projected income for the coming year, segmented by product line, follows:

Squares Circles Total

Sales $300,000 $2,500,000 $2,800,000

Less: Variable expenses 100,000 500,000 600,000

Contribution margin 200,000 2,000,000 2,200,000

Less: Direct fixed expenses 28,000 1,500,000 1,528,000

Product margin $172,000 $500,000 $672,000

Less: Common fixed expenses 100,000

Operating income $572,000

The selling prices are $30 for squares and $50 for circles.

Required:

1.Compute the number of units of each product that must be sold for Kenno Company to break even.

Squares Units =

Circles Units =

2.Assume that the marketing manager changes the sales mix of the two products so that the ratio is three squares to five circles. Compute the number of units of each product that must be sold for Kenno Company to break even.Round your answers to the nearest whole number.

Squares Units =

Circles Units =

3.Refer to the original data. Suppose that Kenno can increase the sales of squares with increased advertising. The extra advertising would cost an additional $245,000, and some of the potential purchasers of circles would switch to squares. In total, sales of squares would increase by 25,000 units, and sales of circles would decrease by 5,000 units. Would Kenno be better off with this strategy? If so, give the amount of increase in income.