Problem - The Rural Urban Company is considering manufacturing and selling four different types of lamps. The lamps have a similar design and will sell for the same price and have the same costs. Rural has come up with the following information regarding the manufacturing and selling of the lamps (variable amounts on a per unit basis; fixed expenses in annual totals):

Variable data: Selling Price $70; Direct Materials $15; Direct Labor $10; Variable Overhead $20; Variable Shipping Costs $5.

Annual fixed expenses: Overhead $150,000; Selling and Administrative $125,000.

Required:

1. What is the annual breakeven point in dollar sales and units (lamps)?

2. If Rural has an effective tax rate of 30%, how many lamps must they sell to make $140,000 after taxes?

3. Ignoring income taxes, If 15,000 lamps are sold, what would be the operating income (loss)?

Do not prepare an income statement to calculate the amount.

4. Refer to the original data. If Rural decided to pay a $5 sales commission on each lamp sold it would allow Rural to eliminate a position and reduce fixed selling and administrative costs by $50,000 a year. What would be the point of indifference, in units, between the two alternatives?

5. Refer to your answer in Part 4 (above). If they expect annual sales to be 25,000 lamps per year, should they switch to the $5 sales commission or continue with the fixed salary? Briefly discuss.

6. Refer to the original date. Rural has contacted the City Town Advertising Agency to possibly do their advertising for the lamps. If Rural signs a contract for $25,000 for City Town to handle their account for one-year, how many additional units will have to be sold to cover the advertising cost?