During 2015, Dassell Systems reported total sales of $300,000, at a price of $20

Question

During 2015, Dassell Systems reported total sales of $300,000, at a price of $20 and per unit variable expenses of $12, for the sales of their single product. The Company is considering the following 2 options for 2016: Option A: Improve the product quality which will increase direct material cost per unit by $1 Invest in a fixed cost marketing campaign which will total $24,000 per year These changes are expected to result in an increase in sales volume by 10% Option B: Reduce the product quality which will decrease direct labor costs by $3 per unit Introduce an incentive program to Sales personnel paying them variable compensation 5% of sales (with no change in their fixed base compensation) These changes are expected to result in an increase in sales volume by 15% Would you implement either of these options the company is considering, why or why not, noting their financial impact on net operating income.

Explanation / Answer

Dassell System Present Option A Option B Number of Units sales 15,000 16,500 17,250 Sales at $20 per unit $3,00,000 $3,30,000 $3,45,000 Less: Variable costs $1,80,000 $2,14,500 $1,72,500 Contribution Margin $1,20,000 $1,15,500 $1,72,500 Fixed expenses $1,00,000 $1,24,000 $1,00,000 Net Operating Income $20,000 -$8,500 $72,500 We will recommend option B, as it will increase the present net operating income from $20,000 to $72,500.

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