Problem 1 Company XYZ has $2,500,000 in fixed costs. It sells products at an average selling price of $50. Average variable costs amount to 60% of selling price. The marketing department proposes spending $500,000 on an advertising campaign which will result in increased volume of between 10,000 and 30,000 units. Determine: 1. Breakeven volume before the proposed ad campaign 2. Breakeven volume if ad campaign undertaken 3. Minimum and maximum incremental profit if ad campaign undertaken 4. Would you support the proposal? Why or why not? 5. Unit volume to achieve an operating profit of $800,000 assuming the ad campaign is undertaken 6. Operating income at unit volume of 200,000 units assuming ad campaign is undertaken 7. Margin of safety assuming volume of 200,000 units is achieved and ad campaign undertaken 8. Incremental operating income if an additional 1,000 units are sold Problem 2 Company ABC has fixed costs of $320,000 and variable costs equal to 60% of sales. If its margin of safety is 20%, what is the company's operating profit? Questions: 1. Breakeven analysis is an extremely useful tool. It looks at the incremental profit impact from changes in costs and volumes. What critical assumption is made to enable us to use this tool? 2. What is the primary concept underlying breakeven analysis and the key to incremental profitability analysis?