Question 3

W Ltd maker of quality pens has experienced a steady growth in sales for the past five years. However, increased competition has led the Managing Director W ltd to believe that an aggressive advertising campaign will be necessary next year to maintain the company's accountant has prepared and presented to the Managing Director the following data for the current year 2020.

COST SCHEDULE

Variable cost per pen

Direct labour 8.00

Direct material 3.25

Variable overhead 2.50

Total Variable cost 13.75

Fixed cost

Manufacturing 25,000

Selling 40,000

Administrative 70,000

Total Fixed Costs 135,000

Selling price 25

Expected sales 2020 (20,000units) 500,000

Tax Rate 20%

The Managing Director has set a target for 2021 at a level of 550,000 (or22,000pens)

Required

(a)

What is the projected after-tax net income for 2020?

(b)

What is the break-even point in unit for 2020?

(c)

The Managing Director believes that an additional selling expense of 11,250 for advertising in 202, with other cost remaining constant, will be necessary to attain, the sales target. What will be the after-tax net income for 2020 if the additional 11,250 is spent?

(d)

What will be the break-even point in pound sales for 2021 if the additional 11,250 is spent?

(e)

If the additional 11,250 is spent on advertising in 2020, what is the required sale level in pound sales to equal 2020 after-tax net income?

(f)

At a sales level 22,000 units. what maximum amount can be spent on advertising if an after-tax income of 60,000 is desired?