Jane Westerlund owns a picture-framing store, The Caplow Co. The average price she receives for a framed picture is $120. This price must cover her costs for a typical framed picture, which consists of $5 for glass, $2 for matting, $13 for the frame, and $30 for the labor involved. She must also cover monthly expenses of $1,000 for rent and insurance, $200 for heat and electricity, $500 for advertising, and $3,500 for her salary. Assuming there is no change in price or the quantity demanded, if Westerlund wants to increase her advertising expenses to a total of $1,000 (a $500 increase), this would cause total costs to and the break-even quantity to .

this would cause total costs to Increase and the break-even quantity to Increase.

Explanation:

Total Cost is the Sum of All Manufacturing and Non-Manufacturing  Cost of a product.

Advertising expense before adjustments are at $500. The cost of advertising does not vary with the sales quantities therefore this is a fixed cost.

Therefore an Increase in the advertising expense causes an increase in Total cost figure.

Break even quantity is a function of Fixed Costs divided by Contribution per unit.The break even quantity will definitely change. By increasing the fixed costs (Advertising Expense), the Break even quantity will increase.

Assuming there is no change in price or the quantity demanded, if Westerlund wants to increase her advertising expenses to a total of $1,000 (a $500 increase), this would cause total costs to INCREASE and the break-even quantity to INCREASE.

Explanation:

total variable costs per unit = $5 (glass) + $2 (mating) + $13 (frame) + $30 (labor) = $50 per frame

total fixed costs = $1,000 (rent) + $200 (utilities) + $500 (advertising) + $3,500 (manager's salary) = $5,200

sales price = $120 per frame

contribution margin = $120 - $50 = $70 per frame

current break even point = $5,200 / $70 = 74.29 ≈ 75 frames per month

if fixed costs increase by $500 (total fixed costs = $5,200 + $500 = $5,700)

the new break even point = $5,700 / $70 = 81.43 ≈ 82 frames per month

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