Assignment:
Note:
Gosnell Company produces two products - squares and circles. The projected income for the
coming year, segmented by product line, follows:
Squares Circles Total
Sales $300 000 $2 500 000 $2 800 000
Product variable expenses 100 000 500 000 600 000
Product fixed expenses 28 000 1 500 000 1 528 000
Common fixed expenses 100 000
The selling prices are $30 for squares and $50 for circles.
Required:
1. Compute the number of units of each product that must be sold for Gosnell Company to break even.
2. Compute the revenue that must be earned to produce an operating income of 10 percent of sales revenues.
3. Assume that the marketing manager changes the sales mix of the two products so that the ratio is three squares to five circles. Repeat Required 1 and 2.
4. Refer to the original data. Suppose that Gosnell can increase the sales of squares with increased advertising. The extra advertising would cost an additional $45 000 and some of the potential purchasers of circles would switch to squares. In total, sales of squares would increase by 15000 units, and sales of circles would decrease by 5000 units. Using a CVP approach, determine whether or not Gosnell would be better off with this strategy?