Ro and Company, a manufacturer of quality handmade walnut bowls, has had a steady growth in sales for the past five years. However, increased competition has led Mr Ro, the president, to believe that an aggressive marketing campaign will be necessary next year to maintain the company's present growth. To prepare for next year's marketing campaign, the company's controller has prepared and presented Mr Ro with the following data for the current year, 2007:

Variable cost (per bowl):$

Direct materials3.25

Direct manufacturing labour8.00

Variable overhead2.50

Fixed costs:$

Manufacturing25000

Marketing, distribution and customer service110000

Selling price$25

Expected sales: 20,000 units$500000

Income tax rate40%

Required: (WITH SOLUTION METHOD)

1. What is the projected net income for 2007?

2. What is the breakeven point in units for 2007?

3. Calculate the current margin of safety.

4. Mr Ro has set the revenue target for 2008 at a level of $550,000 (or 22,000 bowls). He believes an additional marketing cost of $11,250 for advertising in 2008, with all other costs remaining constant, will be necessary to attain the revenue target. What is the net income for 2008 if the additional $11,250 is spent and the revenue target is met?

5. At a sales level of 22,000 units, what maximum amount can be spent on advertising if a 2008 net income of $60,000 is desired?

6. Removed, not relevant for current syllabus.

7. What is the breakeven point in revenues for 2008 if the additional $11,250 is spent for advertising?

8. If the additional $11250 is spent, what are the required 2008 revenues for 2012 net income to equal 2007 net income?

9. At a sales level of 22,000 units, what maximum amount can be spent on advertising if a 2008 net income of $60,000 is desired?