You are the plant accountant for a company that makes a popular brand of basketball shoes. Currently, your company sells 1,000 pairs of shoes each month for $100 apiece. The variable costs are 40% of sales, and the fixed costs are $35,000/month. The company's advertising director is asking for an increase in her marketing budget of $1,500 per month. She plans to enhance her marketing campaign in a targeted area of the West Coast. She estimates that the additional advertising will result in a 50% increase in demand. For this situation, the additional advertising costs are considered a fixed cost. What is the impact of this request on the company's operating income? On the other hand, the production manager believes that this increase in sales could put pressure on the production line. He estimates that there will need to be a $2.00 increase in labor costs per unit [a pair of shoes].

Consider the following:

• Using the projected monthly income figure calculated above, how many units would the company need to sell to meet the initial monthly operating income figure?
• What is the break-even sales volume needed?

1) Original Break-even calculations

Sales (total number of shoes sold in a month x selling price each shoe)
Variable costs (40%)	40,000
Contribution margin (Sales Variable costs)
Fixed costs given	35,000
Operating income (Contribution margin fixed cost)
Break-even point (fixed costs / variable costs per unit) =

2) Revised Break-even after extra $1,500 of advertising

Sales New Sales (new sales volume x selling price of each shoe) ((50% x 1,000) + 1,000) x $100
Variable costs (original 40% + $2/pair) (Selling price x new variable cost/pair)
Contribution margin (Sales Variable Costs)
Fixed costs (original fixed costs + additional marketing cost) (35,000 + 1,500)	36,500
Operating income (Contribution margin fixed cost)
Break-even point (fixed costs / variable costs per unit) =	=

• Explain the benefits and limitations of break-even analysis.
• Discuss how organizations can use What if? analyses to evaluate alternatives like the Advertising Directors proposal (an example of what if analysis is part 2 of your calculations.
• Given the results of your calculations above compare the pros and cons or each of the two break-even results, and
• Make a recommendation on whether the company should change or not.