During 2015, Spartan Systems reported total sales of $300,000, at a price of $20
ID: 2756030 • Letter: D
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.
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
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.
Explanation / Answer
Solution:-
I would like to implement Option B as the net Operating income is increase by $57,000(77,000-20,000) while comparing to current situation wheareas in option A its net operating loss of$ -26500 so this option is rejected.
Current Situation Option A Option B Particular Per unit Total Per unit Total Per unit Total No of units sold 15000 units 17250 units 17,700 units Sales 20 300,000 20 345,000 20 354,000 - Variable cost 12 180,000 14 241,500 9 159,300 -Variable compenation on sales NA NA NA NA 1 17,700 Contribution 8 120,000 6 103,500 10 177,000 - fixed Cost 100,000 130,000 100,000 Net operating income 20,000 -26500 77,000Related Questions
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