Question

7 Bingley Inc. is a start-up company that produces smart notebooks for elementary school children. In the first year of operation, they sold 20,000 notebooks but incurred a loss of $20,000. They are trying to see if they should make some changes in their operation. 1 Lower the selling price from $20 to $17. 2 Keep the variable cost per unit at $10 per unit 3 Increase the advertising expense by $12,000. Bingley expects that the changes above would increase their sales volume (units) by 60%. What would be the impact of these changes on their profit? A. Bingley's loss will be increased by $6,000. B. Bingley will reduce their loss by $30,000. C. Bingley's loss will be reduced by S12,000. D. Bingley's loss will be reduced by $22,000. E. None of the above. 8 de Bourgh Inc, manufactures and sells two models of ear plugs: Alpha and Beta. The results for the last year for the two products appear below. Alpha Beta Selling price per unit $4.00 S6.00 Variable cost per unit S2.40 $4.20 Number of units sold monthly 300 200 Fixed cost per month S660 The company has developed another product, Gamma, which is of much higher quality. plan to price it at S10 each. The variable cost would be $5 per unit. Because of the limited production facility, the company is considering dropping Beta so that Gamma can be produced. The fixed cost will remain the same. However, the company is worried that they may not be able to sell as many units of Gamma as Beta because of the higher price. The company is also worried that Gamma might reduce the sales of Alpaha. The marketing manager estimates that the company can sell 120 units of Gamma. How many units of Alpha would they have to be able to sell to have the same profit as when they are selling Alpha and Beta? 60.00 units

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Answer 1

First year of operation Selling price per unit Less: Variable cost per unit Contribution margin per unit Number of units sold Total Contribution margin Add: Loss Fixed cost (Advertising expense) $20 10 $10 20,000 $200,000 20,000 $220,000 Second year of operation Selling price per unit Less: Variable cost per unit Contribution margin per unit Number of units sold (20,000 * 1.60) Total Contribution margin Less: Fixed Cost (220,000 + 12,000) Loss $17 10 $7 32,000 $224,000 232,000 $8,000 Impact on profit = Reduction in Bingley Inc. loss by $12,000 (20,000 - 8,000) Answer: [C]

A B с D 1 2 Selling price per unit 3 Less: Variable cost per unit 4 Contribution margin per unit 5 Number of units sold in year 6 Total Contribution margin 7 8 Aggregate Contribution margin 9 Less: Fixed costs annually 10 Profit 11 Alpha $4.00 2.4 $1.60 3600 $5,760 Beta $6.00 4.2 $1.80 2400 $4,320 $10,080 7920 $2,160 12 Gamma $10 5 $5 1440 $7,200 13 Selling price per unit 14 Less: Variable cost per unit 15 Contribution margin per unit 16 Number of units sold in year 17 Total Contribution margin 18 19 Total Contribution margin of Alpha 20 Contribution margin per unit of Alpha 21 No. of units to be sold in a year of Alpha 22 No. of units to be sold monthly $2,880 1.6 1800 1.50 23

A B с D 1 Alpha Beta 4 6 2.4 4.2 =C2-C3 =B2-B3 =300*12 =B5*B4 =200*12 =C5*C4 2 Selling price per unit 3 Less: Variable cost per unit 4 Contribution margin per unit 5 Number of units sold in year 6 Total Contribution margin 7 8 Aggregate Contribution margin 9 Less: Fixed costs annually 10 Profit 11 =B6+C6 =660*12 =B8-B9 12 Gamma 10 5 =B13-B14 =120*12 =B16 B15 13 Selling price per unit 14 Less: Variable cost per unit 15 Contribution margin per unit 16 Number of units sold in year 17 Total Contribution margin 18 19 Total Contribution margin of Alpha 20 Contribution margin per unit of Alpha 21 No. of units to be sold in a year of Alpha 22 No. of units to be sold monthly 23 =B8-B17 1.6 =B19/B20 =B21/12