Break-Even Analysis, Margin of Safety, Increase in Profit
Edison Entrepreneur Services, Inc., is a legal services firm that files the paperwork to incorporate a business. Edison charges $1,200 for the incorporation application package and plans to file 1,500 applications next year. The company’s projected income statement for the coming year is:
|
Sales |
1,800,000 |
|
Less variable expenses |
1,10,000 |
|
Contribution margin |
690,000 |
|
Less fixed expenses |
300,000 |
|
Operating income |
$390,000 |
Required
a. Compute the contribution margin per application and calculate the break-even point in number of applications. (Round to the nearest whole unit, since it is not possible to file a partial application.) Calculate the contribution margin ratio (round to 4 decimal places) and the break-even sales revenue (round to the nearest dollar).
b. What is the current margin of safety in terms of the number of units? What is the current margin of safety in terms of sales dollars?
c. If Edison wants to have operating income of $450,000 next year, how many applications must it process? (Round to the nearest whole unit.) What dollar level of sales is required to achieve operating income of $450,000? (Round to the nearest dollar.)
d. The office manager for Edison has proposed that Edison increase advertising (a fixed cost) for the upcoming year by $80,000; she feels that this increase in advertising will lead to an increase in sales of $324,000. Prepare a new projected income statement for this proposal. Should Edison increase its advertising to this new level?