Question

Exercise 1. Consider the following information developed by the accountant at Speedo, a bicycle retailer: Per Unit 500 Sales (500 bikes) Less: variable expenses Contribution margin Less: fixed expenses Operating income Total $ 250,000 150,000 $100,000 80,000 $ 20,000 Percent 100% 60% 40% $ 200 1. Should Speedo spend $12.000 on advertising to increase sales by 10 percent? 2. Now, in combination with the advertising, Speedo is considering a 10 percent price reduction that will increase sales by 25 percent. What is the income effect? 3. Now, in combination with advertising and a price cut, Speedo will replace $50,000 in sales salaries with a $25 per bike commission, increasing sales by 50 percent above the original 500 bikes. What is the effect on income? 4. Which combination should the company choose?

Answer 1

1)

	Total	Per unit	Percent
Sales	275,000.00	500.00	100%
Variable Expenses	165,000.00	300.00	60%
Contribution Margin	110,000.00	200.00	40%
Fixed Expenses	92,000.00
Operating Income	18,000.00

2)

	Total	Per unit	Percent
Sales	281,250.00	450.00	100%
Variable Expenses	187,500.00	300.00	60%
Contribution Margin	93,750.00	150.00	40%
Fixed Expenses	92,000.00
Operating Income	1,750.00

3)

	Total	Per unit	Percent
Sales	337,500.00	450.00	100%
Variable Expenses	225,000.00	300.00	60%
Contribution Margin	112,500.00	150.00	40%
Fixed Expenses	60,750.00
Operating Income	51,750.00

4)Third Combination the company should choose