Kataya Company makes neoprene wetsuits. The company’s projected income statement for the coming year is as follows: Sales (65,000 units) $15,600,000 Less: Variable costs 8,736,000 Contribution margin 6,864,000 Less: Fixed costs (incl. advertising) 4,012,000 Operating income $2,852,000 Part B – Question 3 continued over page 1901/110.229 Assignment 2 Booklet Distance/Internal Manawatu/Auckland/Distance 15 Part B – Question 3 continued Required: Show all your workings. I. Calculate the contribution margin per unit and the break-even point in units and dollars. (For units round your answer up to the next whole unit and for $ to the nearest dollar). (3 marks) II. Calculate the margin of safety in dollars. (Round your answer up to the nearest dollar). (2 marks) III. How many units must be sold to earn an after-tax profit of $1.254 million? Assume a tax rate of 40 per cent. (Round your answer up to the next whole unit). (6 marks) IV. Suppose actual sales revenue exceed the estimated amount on the projected income statement by $612,000. Without preparing a new income statement, determine the amount by which the profits are underestimated. (4 marks) V. The company’s management has decided to increase the advertising budget by $140,000 and reduce the average selling price to $200. These actions will increase sales revenues by $1 million. Will this improve the company’s financial situation? Prepare a new income statement to support your answer.
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