Problem 6-17 (Algorithmic) CVP: What-If Analysis Red Rock, Inc. mines and distri
ID: 2781314 • Letter: P
Question
Problem 6-17 (Algorithmic)
CVP: What-If Analysis
Red Rock, Inc. mines and distributes various types of rocks. Most of the company's rock is sold to contractors who use the product in highway construction projects. Aracely Hudson, company president, believes that the company needs to advertise to increase sales. She has proposed a plan to the other managers that Red Rock, Inc. spend $116,000 on a targeted advertising campaign. The company currently sells 25,000 tons of aggregate for total revenue of $5,450,000. Other data related to the company's production and operational costs follow:
Required:
A. Compute the break-even point in units (i.e., tons) for Red Rock, Inc. If required, round interim calculations to 2 decimal places, use your rounded number in subsequent calculations, and round your answer to nearest whole number.
tons
B. Compute the contribution margin ratio for Red Rock, Inc. Round your answer to two decimal places. Ensure that answer is entered in decimals and not in percentages.
C. If Aracely decides to spend $100,000 on advertising and the company expects the advertising to increase sales by $200,000, should the company increase the advertising?
If the company increases the advertising, the contribution margin will SelectincreasedecreaseItem 3 by $ and net income will SelectincreasedecreaseItem 5 by $ .
Direct labor $1,590,000 Variable production overhead 220,000 Fixed production overhead 370,000 Selling and administrative expenses: Variable 53,000 Fixed 317,000Explanation / Answer
A.
Revenue =5,450,000
Direct labor = 1,590,000
Variable production overhead = 220,000
Variable Selling and administrative expenses = 53,000
Total Variable Costs = 1,863,000
Contribution = 3,587,000 (Revenue less Variable Costs)
Units = 25,000
Contribution per unit = 143.48
Fixed production overhead = 370,000
FIxed Selling and administrative expenses = 317,000
Total Fixed Costs = 687,000
Break even point= Fixed Costs/Contribution per unit Break even point = 687,000/143.48
Break even point= 4788.12 units (i.e., tons)
B.
CM Ratio = (Sales - Variables Expenses)/Sales = (5,450,000 - 1,863,000)/(5,450,000) = 0.66
C. Revenue/Unit = 5,450,000/25,000 = 218
Additional Units Sold = 200,000/218 = 917.32
DL/Unit = 63.60
Variable Overheads/Unit = 8.80
Variable SGA/Unit =2.12
Revenue =5,650,000
Direct labor = 1,590,000 + 917.32*63.60.=
Variable production overhead = 220,000 + 917.32*8.80 =
Variable Selling and administrative expenses = 53,000 + 917.32*2.12 =
Total Variable Costs = 1,863,000 + 68,367 = 1,931,367
Contribution = 3,718,633 (Revenue less Variable Costs)
Contribution Increases by 131,633
Units = 25,000 + 917.32 = 25,917.32
Contribution per unit = 143.48
Net Income Increases by 131,633 - 116,000 = 15,633