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.

........................Total.............Per Unit

Sales .......................$300,000 ..........$20

Variable Exp............$180,000.............$12

Contribution Margin $120,000............$8

Fixed Expenses.......$100,000........

Net Operating Income...$20,000

The Company is considering the following 2 options for 2016:

Option A:

1. Improve the product quality which will increase direct material cost per unit by $1

2. Invest in a fixed cost marketing campaign which will total $24,000 per year

3. These changes are expected to result in an increase in sales volume by 10%

Option B:

1. Reduce the product quality which will decrease direct labor costs by $3 per unit

2. Introduce an incentive program to Sales personnel paying them variable compensation 5% of sales (with no change in their fixed base compensation)

3. 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

Units 300000/20 15000 New Units 15000*110% 16500 Per Unit Total Sales 20 330000 Variable Cost 13 214500 Contribution 115500 Fixed Costs 124000 Net Opearting Income -8500 Option B Sales Volume 15000*115% 17250 Sales 20 345000 Variable Cost 9 155250 Sales Compensation 345000*5% 17250 Contribution 172500 Fixed Cost 100000 Net Opearting Income 72500 The option B will be selected as it will increase the net operating income

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.