Red Rock, Inc. mines and distributes various types of rocks. Most of the company's rock is sold...

Question:

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 a plan to the other managers that Red Rock, Inc. spends $91,000 on a targeted advertising campaign. The company currently sells 28,000 tons of aggregate for total revenue of $5,180,000. Other data related to the company's production and operational costs follow:

Direct labor $1,520,000
Variable production overhead 250,000
Fixed production overhead 400,000
Selling and administrative expenses:
Variable 51,000
Fixed 349,000

Required:

A. Compute the break-even point in units (i.e., tons) for Red Rock, Inc. If required, round intermediate calculations to 2 decimal places, use your rounded number in subsequent calculations, and round your answer to nearest whole number (in tons).

B. Compute the contribution margin ratio for Red Rock, Inc. Round your answer to two decimal places. Ensure that the answer is entered in decimals and not in percentages.

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 (increase or decrease) by $_____ and net income will (increase or decrease) by $_____.

Break-even sales:

The concept of break-even is used in different decision-making evaluations. In the marketing plans, it is essential for the company to understand that the additional costs to improve marketing should be covered by the additional revenue it would generate. The break-even point is calculated by dividing fixed costs/contribution margin per unit.

Answer and Explanation:


A. Let us calculate net income & break-even point:


Description Amount ($) Amount ($) per unit
Sales $5,180,000.00 $185.00
Less :...

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Using Break-Even Analysis to Evaluate a Marketing Plan

from UExcel Principles of Marketing: Study Guide & Test Prep

Chapter 3 / Lesson 4
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