Posted: July 12th, 2016

Compute the contribution margin ratio for Red Rock, Inc?

Sales to Reach After-Tax Profit

Securit Enterprises currently sells its padlocks for $20 each. The locks have a variable cost of $10, and the company’s annual fixed costs are $150,000. The company’s tax rate is 38 percent.

Calculate the number of locks that must be sold to earn an after-tax profit of $22,000.

CVP: What-If Analysis

Red Rock, Inc. mines and distributes various types of rocks. Most of the company’s rock is sold to contractors who use the product in highway construction projects. Aracely Hudson, company president, believes that the company needs to advertise to increase sales. She has proposed plan to the other managers that Red Rock, Inc. spend $120,000 on a targeted advertising campaign. The company currently sells 27,000 tons of aggregate for total revenue of $5,010,000. Other data related to the company’s production and operational costs follow:

Direct labor $1,540,000
Variable production overhead 230,000
Fixed production overhead 380,000

Selling and administrative expenses:
Variable 53,000
Fixed 327,000

A. Compute the break-even point in units (i.e., tons) for Red Rock, Inc.

B. Compute the contribution margin ratio for Red Rock, Inc.

C. If Aracely decides to spend $100,000 on advertising and the company expects the advertising to increase sales by $200,000, should the company increase the advertising?

If the company increases the advertising, the contribution margin will — by $ — and net income will — by $—

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