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Gosnell Company: Cost Volume Profit Analysis

(See attached file for full problem description)

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Note:
Gosnell Company produces two products - squares and circles. The projected income for the
coming year, segmented by product line, follows:

Squares Circles Total

Sales $300 000 $2 500 000 $2 800 000

Product variable expenses 100 000 500 000 600 000

Product fixed expenses 28 000 1 500 000 1 528 000

Common fixed expenses 100 000

The selling prices are $30 for squares and $50 for circles.

Required:

1. Compute the number of units of each product that must be sold for Gosnell Company to break even.

2. Compute the revenue that must be earned to produce an operating income of 10 percent of sales revenues.

3. Assume that the marketing manager changes the sales mix of the two products so that the ratio is three squares to five circles. Repeat Required 1 and 2.

4. Refer to the original data. Suppose that Gosnell can increase the sales of squares with increased advertising. The extra advertising would cost an additional $45 000 and some of the potential purchasers of circles would switch to squares. In total, sales of squares would increase by 15000 units, and sales of circles would decrease by 5000 units. Using a CVP approach, determine whether or not Gosnell would be better off with this strategy?

Solution Preview

See attached file.

This is a problem involving sales mix with 2 products. In order to determine the breakeven point, one has to first calculate the total contribution margin, which is done by adding the total sales and subtracting the total variable expenses. The total contribution margin then is $2,800,000 minus $600,000, or $2,200,000. Then one calculates the contribution margin ratio by dividing the contribution margin by total sales. When you get this, you divide that into TOTAL fixed expenses ($1,628,000) to get the breakeven sales. You are not ...

Solution Summary

In both a word doc and an excel file, the questions are answered in an understandable format.

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