Red Rock, Inc. mines and distributes various types of rocks. Most of the company’s rock is sold to contractors who use the product in highway construction
projects. Aracely Hudson, company president, believes that the company needs to advertise to increase sales. She has proposed a plan to the other managers that
Red Rock, Inc. spend $92,000 on a targeted advertising campaign. The company currently sells 26,000 tons of aggregate for total revenue of $5,420,000. Other
data related to the company’s production and operational costs follow:
| Direct labor | $1,460,000 |
| Variable production overhead | 230,000 |
| Fixed production overhead | 380,000 |
| Selling and administrative expenses: | |
| Variable | 53,000 |
| Fixed | 327,000 |
Required:
A. Compute the break-even point in units (i.e., tons) for Red Rock, Inc. If required, round interim calculations
to 2 decimal places, use your rounded number in subsequent calculations, and round your answer to nearest whole number.
______ tons
B. Compute the contribution margin ratio for Red Rock, Inc. Round your answer to two decimal
places. Ensure that answer is entered in decimals and not in percentages.
______
C. If Aracely decides to spend $100,000 on advertising and the company expects the advertising to increase sales by $200,000, should the
company increase the advertising?
If the company increases the advertising, the contribution margin will (increase / decrease) by $______ and net income will (increase / decrease) by $_______.
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