MULTIPLE-PRODUCT ANALYSIS, CHANGES IN SALES MIX, SALES TO EARN TARGET OPERATING INCOME
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
|
|
Less: Variable expenses
|
100,000
|
500,000
|
600,000
|
|
Contribution margin
|
$200,000
|
$2,000,000
|
$2,200,000
|
|
Less: Direct fixed expenses
|
28,000
|
1,500,000
|
1,528,000
|
|
Product margin
|
$172,000
|
$ 500,000
|
$ 672,000
|
|
Less: Common fixed expenses
|
|
|
100,000
|
|
Operating income
|
|
|
$ 572,000
|
The selling prices are $30 for squares and $50 for circles.
1. Compute the number of units of each product that must be sold for Gosnell Company to break even.
2. Assume that the marketing manager changes the sales mix of the two products so that the ratio is three squares to five circles. Repeat Requirement 1.
3. Refer to the original data. Suppose that Gosnell can increase the sales of squares with increased advertising. The extra advertising would cost an additional $245,000, and some of the potential purchasers of circles would switch to squares. In total, sales of squares would increase by 25,000 units, and sales of circles would decrease by 5,000 units. Would Gosnell be better off with this strategy?