Question

Question 30 Not yet answered Points out of 3.0 P Flag question The sole product of LCO Corporation sells for $200 and its fixed costs total $449,000. Sales are currently 5,900 per month. Variable costs per unit currently total 35% of the sales price. Consider the following alternatives to increase sales independent of each other: Part A The marketing manager believes that a $6,000 increase in the monthly advertising budget would result in an increase in monthly sales of 130 units. What would be the effect of this increase in advertising on the company's monthly income? Part B Management believes monthly sales can be increased by 650 units if additional quality control steps are taken. These steps would mean an increased variable cost per unit of $8. What is the expected effect on the company's monthly income of adding these additional quality control steps? Part The marketing manager believes that sales staff could sell as additional 160 units of product each month if properly motivated, and is considering cutting their collective monthly salaries by $28,000 while giving them a $6 commission on each unit sold. What effect should this strategy have on monthly income? of $

Answer 1

A)	Contribution margin per unit = Sales price - variable cost
	=$200- ($200*0.35)
	=$200-70
	=$130
	Increase in net income would be
	Increase in contribution	$                16,900
	(130 units $*130)
	Less:
	Additional Expenses	$                  6,000
	Increase Net Income	$                10,900
B)
	Company's Present Profit
	Sales	$          11,80,000
	($200*5900)
	Less:
	Variable cost	$            4,13,000
	($5900*$70)
	Contribution Margin	$            7,67,000
	Less:
	Fixed cost	$            4,49,000
	Net profit	$            3,18,000
	Profit If quality control steps taken
	Sales	$          13,10,000
	($200*6550)
	Less:
	Variable cost	$            5,10,900
	($6550*$78)
	Contribution Margin	$            7,99,100
	Less:
	Fixed cost	$            4,49,000
	Net profit	$            3,50,100
	Increase in profit = $350100-318000
	=32100
C)	Company's Present Profit
	Sales	$          11,80,000
	($200*5900)
	Less:
	Variable cost	$            4,13,000
	($5900*$70)
	Contribution Margin	$            7,67,000
	Less:
	Fixed cost	$            4,49,000
	Net profit	$            3,18,000
	Sales	$          12,12,000
	($200*6060)
	Less:
	Variable cost	$            4,60,560
	(6060*$76)
	Contribution Margin	$            7,51,440
	Less:
	Fixed cost	$            4,21,000
	Net profit	$            3,30,440
	Increase in profit = $330440 -318000
	=12440