Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells fo

Question

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $24 per unit. Variable costs are $12.00 per unit, and fixed costs total $161,000 per year.

Assume again that the company sold 30,000 units last year. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $2.4 per unit. He thinks that this move, combined with some increase in advertising, would increase annual sales by 35%. By how much could advertising be increased with profits remaining unchanged?

Explanation / Answer

Profit on 30,000 units last year: 30,000*(24-12) - 161,000 = 199,000 increasing commision by 2.4 would increase variable costs by 2.4 new contribution margin per unit 24 - 12 - 2.4 = $9.60 35% increase in sales = 30,000*1.35 = 40,500 units (199,000 + 161,000 + increase in advertising)/9.60 = 40,500 360,000 + increase in advertising = 388,800 increase in advertising = 388,800 - 360,000 = 28,800 answre: 28,800

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