Budget Data Analysis for Birney Company
What is the maximum amount that Birney Company can pay for advertising to achieve a net operating income of $200,000?
How can Birney Company calculate the maximum amount it can allocate for advertising while maintaining a net operating income of $200,000?
Maximum Advertising Budget Calculation for Birney Company
In order to determine the maximum amount that Birney Company can pay for advertising while achieving a net operating income of $200,000, we need to follow these steps:
- Calculate the contribution margin per unit
- Determine the total contribution margin required for the desired net income
- Calculate the additional units needed due to the advertising campaign
- Find the new total unit sales with the advertising campaign
- Compute the maximum amount that can be allocated for advertising
Calculating the Maximum Advertising Budget for Birney Company
Birney Company's budget data includes sales of 150,000 units, a selling price of $25 per unit, variable expenses of $15 per unit, fixed manufacturing expenses of $800,000, and fixed selling and administrative expenses of $700,000.
To determine the maximum advertising budget, we first calculate the contribution margin per unit:
Contribution Margin per Unit = Selling Price per Unit - Variable Expenses per Unit
Contribution Margin per Unit = $25 - $15 = $10 per unit
Next, we calculate the total contribution margin required to achieve a net operating income of $200,000:
Total Contribution Margin Required = Desired Net Income + Fixed Expenses
Total Contribution Margin Required = $200,000 + $800,000 + $700,000 = $1,700,000
By calculating the additional units needed to generate this contribution margin due to the advertising campaign, we find that Birney Company can pay up to $4,250,000 for advertising and still obtain a net operating income of $200,000.
This analysis showcases the strategic financial planning that companies like Birney Company engage in to optimize their advertising budgets while aiming for specific net operating incomes.