Refer back to the original income Element on the ton of page 1 (NOT your answer

Question

Refer back to the original income Element on the ton of page 1 (NOT your answer to question #1). Trek is considering another option (Plan B) to increase sales. a) What is the profit impact if Trek can increase unit sales from 8,000 to 11,000 bicycles by increasing its advertising budget by 5220,000 (fixed expense). The price for bicycles remains at S250 each and the variable cost per bike remains at S150 each. Show your answer by-preparing an updated Income Statement below. A company's profits are more sensitive to changes in sale when it's Operating Leverage is higher. Operating Leverage = Contribution Margin/Net Income Under which option is Trek's Operating Leverage Higher? Plan A or Plan B? If Track is confident that its can exceed the projected level of 11, 000 bicycles - which Plan should it implement? If Treck is concerned that its sales may not reach the projected level of 11, 000 bicycles - which Plan should it implement?

Explanation / Answer

(A)

(B)

A companys profits are more sensitive to changes in sales when its Operating Leverage is higher

so operating liverage could find in following ways

Leverage = Contribution Margin/ Net Income

First of all we need to find Net income of A

It is as follow

Now we will find Operating Leverage as follow

Under option B Treck Company have higher operating Leverage

(C) .

If Trek is confident that its can exceed the projected level of 11,000 bicycles which Plan should it implement?

Answer :

Company should chose plan B because it hase positive and higher operting income as agianst to these company have 0 income in plan . So company should hose plan B

(D)

If Trek is concerned that its sales may not reach the projected level of 11,000 bicycles which Plan should it implement

Answer : PLAN A

Company should chose plan A because if company could not reach at 11000 level of production then to incure addition 220,000 fixed cost would not be recovered so it is better for company to stay with 8000 units

Treck Bycicle company Updated Income statement Plan B (1100 Units) Per Unit Tital Percetage Sales (1100*250) $       250.00 $           2,750,000.00 100% Less: Variable cost $       150.00 $           1,650,000.00 60% Contribution Margin $       100.00 $           1,100,000.00 40% Less: Fixed Expenses $         92.73 $           1,020,000.00 37% Net Operating Income (loss) $           7.27 $                80,000.00 3%

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