CVP with taxes (adapted from CMA exam). Lighthouse Company, maker of quality flashlights, has experienced a steady growth in sales for the past five years. However, increased competition has led Mr. Das, the CEO, to believe that to maintain the company's present growth requires an aggressive advertising campaign next year. To prepare the next year's advertising campaign, the company's accountant has prepared and presented to Mr. Das the following data for the current year, Year 1:
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Cost Schedule
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Variable Costs:
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Direct Labor
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$10.00 per Flashlight
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Direct Materials
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4.50
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Variable Overhead
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2.00
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Total Variable Costs
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$16.50 per Flashlight
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Fixed Costs:
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Manufacturing
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$ 40,000
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Selling
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30,000
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Administrative
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80,000
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Total Fixed Costs
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$ 150,000
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Selling Price, per Flashlight
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$ 40.00
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Expected Sales, Year 1 (25,000 flashlights) Tax Rate: 35 Percent
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$1,000,000
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Mr. Das has set the sales target for Year 2 at a level of $1,120,000 (or 28,000 flashlights).
a. What is the projected after-tax operating profit for Year 1?
b. What is the after-tax break-even point in units for Year 1?
c. Mr. Das believes that to attain the sales target (28,000 flashlights) requires an additional selling expense of $40,000 for advertising in Year 2, with all other costs remaining constant. What will be the after-tax operating profit for Year 2 if the firm spends the additional $40,000?
d. What will be the after-tax break-even point in sales dollars for Year 2 if the firm spends the additional $40,000 for advertising?
e. If the firm spends the additional $40,000 for advertising in Year 2, what is the sales level in dollars required to equal Year 1 after-tax operating profit?
f. At a sales level of 28,000 units, what is the maximum amount the firm can spend on advertising to earn an after-tax operating profit of $75,000?