You are the chief financial analyst of Hercules Manufacturing Limited. The company manufactures bowls and has been planning to aggressively expand its sales into the Middle Eastern markets. You have been tasked to analyse its reports using CVP and provide explanations to the Director, Tierra Muller.

The operating statement relating to the month ended September 30, 2019 of Hercules Manufacturing Limited is as follows:
                                             $’000                         $’000
Sales (22,000 units)                                                3,300
Direct materials                      726
Direct labour                           374
Production overheads             798
Total                                                                        1,898
Gross profit                                                          1,402
Selling overheads                                                1,042
Net profit                                                             360

The variable production overheads were $9 per unit while the variable selling overheads were $11 per unit.

Required:

a) The company has a capacity of 30,000 units per year. Management is not happy with the financial performance for the last year, and one course of action for the coming year were proposed in the recent management meeting:
• The sales manager believed that unit volume would increase by 30% with the incurrence of $200,000 on advertising.
Prepare a CVP income statement for the alternative (showing columns for totals only). Would you recommend this alternative and why?
b) The company has a target net income of $750,000. Assume additional advertising costs will be incurred, what is the required sales in dollars for the company to meet its target?