Original data: Feather Friends, Inc., distributes a high-quality wooden birdhous

Question

Original data: Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $22 per unit. Variable costs are $6.6 per unit, and fixed costs total $177,000 per year.

Refer to the original data. Assume again that the company sold 33,000 units last year. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1.6 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

Cont pu = SP pu - VC pu = $22-$6.60 = 15.40 pu So Profit for 33000 units = 33000*COnt pu - FC = 33000*15.40 - 177000 = $331,200 New Sales = 1.35*33000 = 44550 Units So we have Profit = Sales - Exp ie EXP = Sales - Profit = 44550*SP pu - 331,200 = 44550*$22 - 331,200 = $648,900 So Exp = VC + Sales Comm + Advtg cost = 44550*(6.60+1.60) + Advtg cost So Advtg cost = Exp -44550*(6.60+1.60) = $648,900 -$365,310 = $283,590 So Advtg exp can be max $283,590

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