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

Question

During 2015, Spartan 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:

a. Option A: i. Improve the product quality which will increase direct material cost per unit by $2 ii. Invest in a fixed cost marketing campaign which will total $2,500 per month iii. These changes are expected to result in an increase in sales volume by 15%

b. Option B: i. Reduce the product quality which will decrease direct labor costs by $3 per unit ii. Introduce an incentive program to Sales personnel paying them variable compensation 5% of sales (with no change in their fixed base compensation) iii. These changes are expected to result in an increase in sales volume by 18%

Would you implement either of these options the company is considering, why or why not, noting their financial impact on net operating income.

Total Per Unit Sales 300,000 20 Variable Expenses 180,000 12 Contribution Margin 120,000 8 Fixed Expenses 100,000 Net Operating Income 20,000

Explanation / Answer

ANSWER A. According to me i will Opt A: i. Improve the product quality which will increase direct material cost per unit by $2 ii. Invest in a fixed cost marketing campaign which will total $2,500 per month iii. These changes are expected to result in an increase in sales volume by 15%. because if any company wants to increase their income then in that case company will definately ready to take any type of risk after all there is no profit without taking any risk.

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