Question

5.b. Would you recommend that the company do as the sales manager suggests? Yes ONO 6. Refer to the original data. Assume again that the company sold 30,000 units last year. The president feels that it would be unwise to change the selling price. Instead, he wants to increase the sales commission by $5 per unit. He thinks that this move, combined with some increase in advertising, would increase annual unit sales by 50%. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach. The amount by which advertising can be increased is

Answer 1

4.aDegree of operating leverage = Contribution Margin/Net Operating income

= 372000/93000

= 4 times

	30000		36000
	Total	Per unit	Total	Per unit
Sales	900000	30	950400	26.4
Less: Variable expenses	360000	12	432000	12
Contribution Margin	540000	18	518400	14.4
Less: Fixed costs	279000	9.3	346000	9.611111111
Net Operating Income	261000	8.7	172400	4.788888889
5-b No
Contribution Margin	585000
Present fixed costs	279000
Less: Desired Profit	261000
Maximum increase in advertising	45000

A 1 2 3 Sales 4 Less: Variable expenses 5 Contribution Margin 6 Less: Fixed costs 7 Net Operating Income в 30000 Total =30000*C3 =30000*C4 =30000*C5 279000 =B5-B6 с D E =B1*1.2 Per unit Total Per unit 30 =36000*E3 =30*0.88 12 =36000*E4 =C4 =C3-C4 =36000*65 =E3-E4 =B6/30000 =B6+67000 =D6/36000 =B7/30000 =D5-D6 =D7/36000 8 95-b No 10 Contribution Margin -45000*(30-12-5) 11 Present fixed costs =B6 12 Less: Desired Profit =B7 13 Maximum increase in advertising =B10-B11-B12