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J.T. Brooks and Company, a manufacturer of quality handmade walnut bowls, is considering its financial projections for the year 2017 and 2018. In light of increased competition, the company's president, Mr. Brooks, is contemplating an aggressive marketing campaign for 2018. To make informed decisions, we will analyze the provided financial data and answer specific questions regarding projected net income, breakeven points, and advertising expenses.
To calculate the projected net income for 2017, we will use the following formula:
Projected Net Income = (Revenues - Variable Costs - Fixed Costs) / (1 - Tax rate)
Given the provided data:
| Revenues | $770,000 |
| Variable Costs | $431,500 |
| Fixed Costs | $214,500 |
| Tax rate | 40% |
Substituting these values into the formula:
Projected Net Income = ($770,000 - $431,500 - $214,500) / (1 - 0.40) = $89,100
Therefore, the projected net income for 2017 is $89,100.
The breakeven point in units can be calculated using the following formula:
Bowls needed to break even = Fixed Costs / Contribution margin per bowl
Given:
| Fixed Costs | $214,500 |
| Contribution margin per bowl | $35.00 - $18.50 = $16.50 |
Substituting these values into the formula:
Bowls needed to break even = $214,500 / $16.50 ≈ 13,000
Therefore, the breakeven point in units for 2017 is approximately 13,000 bowls.
Mr. Brooks aims to achieve a revenue target of $875,000 in 2018 by spending an additional $16,500 on advertising while keeping all other costs constant.
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To calculate the net income for 2018 with this additional expense, we will use the same formula as in requirement 1:
Projected Net Income = (Revenues - Variable Costs - Fixed Costs) / (1 - Tax rate)
Given the following data for 2018:
| Revenues | $875,000 |
| Variable Costs | $448,600 |
| Fixed Costs | $214,500 |
| Tax rate | 40% |
Substituting these values into the formula:
Projected Net Income = ($875,000 - $448,600 - $214,500) / (1 - 0.40) = $108,900
Therefore, the net income for 2018 with the additional $16,500 in advertising expense is $108,900.
To calculate the breakeven point in revenues for 2018 with the additional $16,500 in advertising expense, we need to find the number of bowls needed to break even and then determine the corresponding revenue.
From requirement 2, we know that the breakeven point in units is approximately 13,000 bowls.
Revenue = Bowls needed to break even × Selling price per bowl
Substituting the values:
Revenue = 13,000 × $35.00 = $455,000
Therefore, the breakeven point in revenues for 2018 with the additional advertising expense is $455,000.
To determine the required 2018 revenues for the net income to equal the 2017 net income, we can use the formula:
Target Net Income = (Revenues - Variable Costs - Fixed Costs) / (1 - Tax rate)
Given the target net income of $89,100 (from requirement 1), we can rearrange the formula to solve for revenues:
Revenues = (Target Net Income + Variable Costs + Fixed Costs) × (1 - Tax rate)
Substituting the values:
Revenues = ($89,100 + $431,500 + $214,500) / (1 - 0.40) = $805,000
Therefore, the required 2018 revenues for the net income to equal the 2017 net income are $805,000.
To calculate the maximum amount that can be spent on advertising in 2018 while achieving a net income of $108,450, we can use the same formula as in requirement 1:
Projected Net Income = (Revenues - Variable Costs - Fixed Costs) / (1 - Tax rate)
Given the following data for 2018:
| Revenues | ? |
| Variable Costs | $448,600 |
| Fixed Costs | $214,500 |
| Tax rate | 40% |
Substituting the values and solving for revenues:
$108,450 = (Revenues - $448,600 - $214,500) / (1 - 0.40)
$108,450(1 - 0.40) = Revenues - $448,600 - $214,500
$65,070 = Revenues - $448,600 - $214,500
$65,070 = Revenues - $663,100
Revenues = $65,070 + $663,100
Revenues = $728,170
Therefore, to achieve a net income of $108,450 in 2018, the maximum amount that can be spent on advertising is $728,170.
In conclusion, this accounting lab report analyzed the financial projections for J.T.
Brooks and Company for the years 2017 and 2018. It calculated the projected net income for 2017, the breakeven points, and the impact of additional advertising expenses on net income for 2018. The report provides valuable insights to assist Mr. Brooks in making informed decisions regarding the company's financial strategy for the upcoming year.
Financial Analysis Report: J.T. Brooks and Company. (2024, Jan 24). Retrieved from https://studymoose.com/document/financial-analysis-report-j-t-brooks-and-company
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