Universal Sports Exchange has just received notice from C&C Sports that the pric

Question

Universal Sports Exchange has just received notice from C&C Sports that the price of a baseball jersey will be increasing to $15.30 next year. In response to this increase, Universal is planning its sales and marketing campaign for the coming year. Managers have developed two possible plans and have asked you to evaluate them.

The first plan calls for passing on the entire $0.50 cost increase to customers through an increase in the sales price. Managers believe that $10,000 in additional advertising targeted directly to current customers will allow the sales force to reach the current year's sales volume of 51,975 jerseys.

The second plan relies on a new advertising campaign that focuses on the sales price remaining the same as last year. The campaign would include a new database that offers more potential customers than Universal has had access to in the past. The cost of the campaign is expected to be $5,000. Managers believe that the campaign will be more successful in generating new sales than the current incentive-based sales and marketing plan. As a result, they want to reduce the sales commission from 6% to 4% of sales and increase sales salaries by $22,000. The campaign is expected to generate an additional 10% in sales volume.

UNIVERSAL SPORTS EXCHANGE
Contribution Format Income Statement
for the 52 Weeks Ending February 1, 2014 Per Unit Ratio Sales $1,039,500 $20.00 100% Less Variable expenses:    Cost of goods sold $769,230 14.80 74%    Sales commissions 62,370 1.20 6%       Total variable expenses 831,600 16.00 80% Contribution margin 207,900 $4.00 20% Less Fixed expenses:    Selling expenses 116,500    Administrative expenses 51,500       Total fixed expenses 168,000 Operating income $39,900 Universal Sports Exchange has just received notice from C&C Sports that the price of a baseball jersey will be increasing to $15.30 next year. In response to this increase, Universal is planning its sales and marketing campaign for the coming year. Managers have developed two possible plans and have asked you to evaluate them.

The first plan calls for passing on the entire $0.50 cost increase to customers through an increase in the sales price. Managers believe that $10,000 in additional advertising targeted directly to current customers will allow the sales force to reach the current year's sales volume of 51,975 jerseys.

The second plan relies on a new advertising campaign that focuses on the sales price remaining the same as last year. The campaign would include a new database that offers more potential customers than Universal has had access to in the past. The cost of the campaign is expected to be $5,000. Managers believe that the campaign will be more successful in generating new sales than the current incentive-based sales and marketing plan. As a result, they want to reduce the sales commission from 6% to 4% of sales and increase sales salaries by $22,000. The campaign is expected to generate an additional 10% in sales volume.

UNIVERSAL SPORTS EXCHANGE
Contribution Format Income Statement
for the 52 Weeks Ending February 1, 2014 Per Unit Ratio Sales $1,039,500 $20.00 100% Less Variable expenses:    Cost of goods sold $769,230 14.80 74%    Sales commissions 62,370 1.20 6%       Total variable expenses 831,600 16.00 80% Contribution margin 207,900 $4.00 20% Less Fixed expenses:    Selling expenses 116,500    Administrative expenses 51,500       Total fixed expenses 168,000 Operating income $39,900 UNIVERSAL SPORTS EXCHANGE
Contribution Format Income Statement
for the 52 Weeks Ending February 1, 2014 Per Unit Ratio $ SHOW SOLUTION SHOW SOLUTION SHOW SOLUTION LINK TO TEXT LINK TO TEXT LINK TO TEXT Alternative 1 Alternative 2 $ $ Universal Sports Exchange has just received notice from C&C Sports that the price of a baseball jersey will be increasing to $15.30 next year. In response to this increase, Universal is planning its sales and marketing campaign for the coming year. Managers have developed two possible plans and have asked you to evaluate them.

The first plan calls for passing on the entire $0.50 cost increase to customers through an increase in the sales price. Managers believe that $10,000 in additional advertising targeted directly to current customers will allow the sales force to reach the current year's sales volume of 51,975 jerseys.

The second plan relies on a new advertising campaign that focuses on the sales price remaining the same as last year. The campaign would include a new database that offers more potential customers than Universal has had access to in the past. The cost of the campaign is expected to be $5,000. Managers believe that the campaign will be more successful in generating new sales than the current incentive-based sales and marketing plan. As a result, they want to reduce the sales commission from 6% to 4% of sales and increase sales salaries by $22,000. The campaign is expected to generate an additional 10% in sales volume.

UNIVERSAL SPORTS EXCHANGE
Contribution Format Income Statement
for the 52 Weeks Ending February 1, 2014 Per Unit Ratio Sales $1,039,500 $20.00 100% Less Variable expenses:    Cost of goods sold $769,230 14.80 74%    Sales commissions 62,370 1.20 6%       Total variable expenses 831,600 16.00 80% Contribution margin 207,900 $4.00 20% Less Fixed expenses:    Selling expenses 116,500    Administrative expenses 51,500       Total fixed expenses 168,000 Operating income $39,900

Explanation / Answer

UNIVERSAL SPORTS EXCHANGE

Per Unit

Ratio

Decrease in operating margin due to increase in cost =39900-13913=25987.5

Plan A

UNIVERSAL SPORTS EXCHANGE

Per Unit

Ratio

Plan B

Per Unit

Ratio

UNIVERSAL SPORTS EXCHANGE

Contribution Format Income Statement for the 52 Weeks Ending February 1, 2014

Per Unit

Ratio

Sales $1,039,500 $20.00 100% Less Variable expenses:    Cost of goods sold $795,218 15.3 77%    Sales commissions 62,370 1.2 6%       Total variable expenses 857,588 16.5 83% Contribution margin 181,913 $2.53 18% Less Fixed expenses:    Selling expenses 116,500    Administrative expenses 51,500       Total fixed expenses 168,000 Operating income $13,913

Decrease in operating margin due to increase in cost =39900-13913=25987.5

Plan A

UNIVERSAL SPORTS EXCHANGE

Contribution Format Income Statement for the 52 Weeks Ending February 1, 2014

Per Unit

Ratio

Sales 51975*20.50 $1,065,488 $20.50 100% Less Variable expenses:    Cost of goods sold $795,218 51975*15.3 15.3 75%    Sales commissions 63,929 51975*1.23 6/100*20.50 $1.23 6%       Total variable expenses 859,147 $16.53 81% Contribution margin 206,341 $3.97 19% Less Fixed expenses:    Selling expenses 126,500 116500+10000    Administrative expenses 51,500       Total fixed expenses 178,000 Operating income $28,341

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