Smith Company sells flags with team logos. Smith has fixed costs of $700,000 per year plus variable costs of $6.00

per flag. Each flag sells for $20.00.

Requirement 1. Use the equation approach to compute the number of flags Smith must sell each year to break even.

First, select the formula to compute the required sales in units to break even.

-

-

=

Target profit

Rearrange the formula you determined above and compute the required number of flags to break even.

The number of flags Smith must sell each year to break even is

.

Requirement 2. Use the contribution margin ratio approach to compute the dollar sales Smith needs to earn $14,000

in operating income for the year. (Round the contribution margin ratio to two decimal places.)Begin by showing the formula and then entering the amounts to calculate the required sales dollars to earn $14,000 in operating income. (Round the required sales in dollars up to the nearest whole dollar. For example, $10.25 would be rounded to $11. Abbreviation used: CM = contribution margin.)

(

+

)

=

Required sales in dollars

(

+

)

%

=

Requirement 3. Prepare

Smith's contribution margin income statement for the year ended December 31, for sales of 44,000 flags. (Round your final answers up to the next whole number.) (Use parentheses or a minus sign for an operating loss.)

Smith Company
Contribution Margin Income Statement
Year Ended December 31, 20XX
Operating Income (Loss)

Requirement 4. The company is considering an expansion that will increase fixed costs by 20% and variable costs by $2.00 per flag. Compute the new breakeven point in units and in dollars. Should Smith undertake the expansion? Give your reasoning. (Round your final answers up to the next whole number.) (Use the equation approach.)

Begin by selecting the formula to compute the required sales in units to break even under the expansion plan.

-

-

=

Target profit

Rearrange the formula you determined above and compute the required number of flags to break even under the expansion plan.

Under the expansion plan, the breakeven point in units would be

flags.

Under the expansion plan, the breakeven point in dollars would be

.

Should Smith undertake the expansion? Give your reasoning.

Smith should only undertake the expansion if expected profits from the expansion

are equal to

are greater than

are less than

the expected costs.