Reference no: EM131295619

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 $111,000 on a targeted advertising campaign. The company currently sells 30,000 tons of aggregate for total revenue of $5,230,000. Other data related to the company's production and operational costs follow:

Direct labor $1,550,000

Variable production overhead 200,000

Fixed production overhead 350,000

Selling and administrative expenses:

Variable 50,000

Fixed 300,000

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 or decrease?) Item 3 by $______ and net income will (increase or decrease?) Item 5 by $______ .