KENTUCKY CORPORATION, INC. is a bookkeeping firm that helps business set up their computerized accounting systems for their business. The company charges $1,000 for the entire basic setup package and plans to file 1,500 setups next year. The company's projected income statement for the coming year is:



Variable costs


Contribution margin


Less: fixed costs


Operating income


1. The company is concerned about the possibility that he may actually lose money this upcoming year and wants to know how much error there is in his forecast. By how many setups can his sales drop before he starts actually losing money?

2. In terms of sales dollars, how far can revenues drop before they start losing money?

3. If the company wants to have operating income of $360,000 next year, how many setups must they process (round to the nearest whole unit)?

4. What dollar level of sales is required to achieve the operating income of $360,000?

5.The company is considering raising their sales price to $1,200 per setup. What effect (in words) will this have on the breakeven point in setups and WHY?   What will be the new breakeven point in setups and revenues?

The office manager for the company has proposed that they increase advertising (a fixed cost) for the upcoming year by $90,000; she feels that this increase in advertising will lead to an increase in sales of $400,000. Assume that the sales price remains at $1,000 per setup. If the proposal is undertaken, the new breakeven point in units and sales $ would be: The company’s new projected operating income (loss) would be: Assume that the company’s tax rate is 20%.   The income tax expense for the year would be: The company’s after-tax income would be: Should the company increase its advertising to this new level? Ignore income taxes in your analysis.

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