Question

3. Percy's Porcelain Works manufactures fine vases. The company produces two designs: a square and a round vase. The planning team is discussing the coming year's activities. To start the discussion, the company controller and the marketing manager have provided the following information on costs and revenues Total expected sales of both products combined 40,000 Square Round $ 25 Selling price (per vase) Less: variable costs (per vase) Direct materials Direct labour 45 Selling Contribution margin (per vase) Percentage of total unit sales Total contribution margin Fixed manufacturing costs Fixed selling and administrative 70% 30% $348,000 $ 712,000 200,000 $364000 expense Operating income 160,000 $ 352,000 The planning team would like to increase operating income by focusing on the round model. To do this, they plan to increase advertising by $200,000 and sales commissions per round vase by $1. The team expects that this will increase sales to a total of 47,000 vases, and increase the sales of round vases from 30% to 40% of the sales mix. What will be the new net operating income if these changes are implemented and the sales are as predicted? a) $262,500 b) $333,000 C) $351,800 d) $533,000

Answer 1

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New Operating Income:
			Square	Round	Total
New Total Sale					47,000
New Product wise Sale	60% and 40%		28,200	18,800
Selling Price per Vase			$          25	$          45
Less: Variable Cost per Vase
Direct Material			$           -5	$           -7
Direct Labor			$           -4	$           -5
Overhead			$           -2	$           -3
Selling	For Round Selling expesense increase by $1		$           -1	$           -2
Contribution Margin per Vase			$          13	$          28
Total Contribution Margin	Sale units*CM per Vase		$ 366,600	$ 526,400	$ 893,000
Less: Fixed Cost
Fixed Manufacturing Cost					$-200,000
Fixed Selling Expense	160000+200000				$-360,000
New Operating Income	Correct Answer is B				$ 333,000