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:

  1. Calculate the contribution margin per unit
  2. Determine the total contribution margin required for the desired net income
  3. Calculate the additional units needed due to the advertising campaign
  4. Find the new total unit sales with the advertising campaign
  5. 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.

← How to increase tee time sales at a golf resort The evolution of employer employee loyalty in today s workplace →