Question

Tenneco Inc. produces three models of tennis rackets: standard, deluxe, and pro. Following are the sales and cost information for last year:

item	standard	deluxe	pro
sales (in units)	100,000	50,000	50,000
sales price per unit	$30	$40	$50
variable manufacturing cost per unit	$17	$20	$25

Fixed manufacturing costs are $800,000, and fixed selling and administrative costs are $400,000. In addition, the company pays its sales representatives a commission equal to 10% of

the price of each racket sold.

(a) If the sales price of deluxe rackets decreases 10%, its sales are expected to increase 30%, but

sales of standard rackets are expected to decrease 5%, as some potential buyers of standard

rackets will upgrade to deluxe rackets. What will be the impact of this decision on Tenneco’s

profits?

(b) Suppose that Tenneco decides to increase its advertising by $50,000 instead of cutting the

price of deluxe rackets. This is expected to increase sales of all three models by 2% each. Is

this decision advisable?

(c) The incentive created by sales commissions has led Tenneco’s sales force to push the higher-

priced rackets more than the lower-priced ones. Is this in the best interests of the company?

Answer 1

First, we will calculate the company's profit under normal circumstances of normal sales unit and sales price.

1) Situation B co Deluxe Delwee Sales (im wits) Sales price sunt Sales (in wahre) (A) $30 $50 Solution: Sineation per original data given in question: tem Standard Pro Sales (in units) 100000 S2000 Soooo Seles price permint $40 Sales (in value) (A) $3,000,000 $ 2,00 qooo $2500000 $17 $20 Variable coat sumit $25 Variable expense $ 1,700000 $1000000 $1,250000 $ 800,000 $ 800000 fined manufacturing $ 200,000 $ 400,000 $ 400,000 Fried selling $300,000 $200,000 $250000 Variable expense 102,000 $30 $3060000 $17 $1734000 $1200000 $306000 $50,000 Total find lost Sales Commission 51000 51000 $YO $50 $3040000 $255godo 320 $25 $10 20000 $1,275.000 $1200000 $1200000 $204000 $255.000 $50,000 $50,000 $2474,000 $2,780000 434000) ($ 230000) $400,000 I adm. erup. Sales Commission Alduertising eup Total Cost (6) $3R90000 ($230000) Total Cost (6) Profit (A-6) $32.00000 (200000) १२,900,000 ($ 400000) $2,700000 ($ 200,000) This decision is not adnisable as it increases the loss of all the three models Deluxe Pro a) Situation A Item Standard 95,000 $ 2,850,000 (c) Situation c The incentive created by sales commissions has led the sales increase ito higher pricel crackets than lower priced ones. This decision is not in the chest interest of the company as lower priced rackets create than higher priced ones because 4 increased in quantity $ 800,000 mere 50,000 65,000 Sales (in mits) $30 $36 $50 Sales price / unit $ 2,500,000 $2340000 Sales (in nature) (A) $20 $17 $25 Variable cost/ unit Variable eut. (in nalue) $1,615,000 $1300000 $1,250,000 fined manf. eup. $800,000 $ 800,000 $ 400,000 $400,000 Furied selling Ledmeup. $400,000 Sales Commission $275,000 $ 234,000 $ 250000 Total Cost (6) $3100000 $2734000 $2700000 Profit (A-1) (250000 ($ 394000) ($ 200,000) Standard here, the loss $50,000 and that of selure decreases by $6000 revenue

Then, we will compare the impact on its profit and the advisability of their decisions under situations a, b and c.

The detailed calculations are made in the image attached.