Thomas Corporation developed the following income statement using a contribution margin approach:

Thomas Corporation

Projected Income Statement

For the Current Year Ending December 31

Sales

$750,000

Less variable costs:

Variable manufacturing costs

$280,000

Variable selling costs

120,000

Total variable costs

400,000

Contribution margin

$350,000

Less fixed costs:

Fixed manufacturing costs

$130,000

Fixed selling and administrative costs

80,000

Total fixed costs

210,000

Operating income

$140,000

The projected income statement was based on sales of 100,000 units. Thomas has the capacity to produce 120,000 units during the year.

Required:

a.Determine the break-even point in units.

b.The sales manager believes the company could increase sales by 8,000 units if advertising expenditures were increased by $22,000. By how much will income increase or decrease if this plan is put into effect?

c.What is the maximum amount the company could pay for advertising (to make the $22,000 advertising campaign worthwhile) if the sales would really increase by 8,000 units due to advertising?

d.Sales manager has also talked to the production and purchasing managers about improving the quality of the product by purchasing a superior material. This change will increase the variable manufacturing cost by 20 cents. Under this option, they plan to raise the selling price by 50 cents, and they still plan to launch the same advertising campaign as above. How many units should they sell under this option to earn the same profit as the first option (option under b, above)

e.Which option would you select? Why? If you need further information, what information would you like?