Question

Vista Seating Company is currently selling 3,000 oversized bean bag chairs a month at a price of ​$90 per chair. The variable cost of each chair sold includes ​$35 to purchase the bean bag chairs from suppliers and a ​$44 sales commission. Fixed costs are $11,000 per month. The company is considering making several operational changes and wants to know how the change will impact its operating income.

Requirements 1. Prepare the company's current contribution margin income statement 2. Calculate the change in operating income that would result from implementing each of the following independent strategy alternatives. Compare each alternative to the current operating income as you calculated in Requirement 1. Consider each alternative separately. a. Alternative 1: The company believes volume will increase by 14% if salespeople are paid a commission of 6% of the sales price rather than the current $4 per unit. b. Alternative 2: The company believes that spending an additional $1,500 on advertising would increase sales volume by 8%. c. Alternative 3: The company is considering raising the selling price to $98, but believes volume would drop by 14% as a result. d. Alternative 4: The company would like to source the product from domestic suppliers who charge $9 more for each unit. Management believes that the "Made in the USA" label would increase sales volume by 14% and would allow the company to increase the sales price by $8 per unit. In addition, the company would have to spend an additional $5,500 in marketing costs to get the word out to potential customers of this change. Print Done

Answer 1

1.

	Per unit	3000 units
Sales Revenue	$            90	$           2,70,000
Less Variable Costs
Purchase cost	$            35	$           1,05,000
Sales Commission	$              4	$              12,000
Total Variable Costs	$            39	$           1,17,000
Contribution Margin	$            51	$           1,53,000
Less Fixed Costs		$              11,000
Net Operating Income		$           1,42,000

2.
a. Sales Commission is 6% of Sales Price i.e. $90 x 6% = $5.40 per unit
New Sales units = 3000 x 1.14 = 3420 units

	Per unit	3420 units
Sales Revenue	$      90.00	$           3,07,800
Less Variable Costs
Purchase cost	$      35.00	$           1,19,700
Sales Commission	$        5.40	$              18,468
Total Variable Costs	$      40.40	$           1,38,168
Contribution Margin	$      49.60	$           1,69,632
Less Fixed Costs		$              11,000
Net Operating Income		$           1,58,632

b.
New Sales units = 3000 x 1.08 = 3240 units
New Fixed Cost = $11000 + $1500 = $12500

	Per unit	3240 units
Sales Revenue	$            90	$           2,91,600
Less Variable Costs
Purchase cost	$            35	$           1,13,400
Sales Commission	$              4	$              12,960
Total Variable Costs	$            39	$           1,26,360
Contribution Margin	$            51	$           1,65,240
Less Fixed Costs		$              12,500
Net Operating Income		$           1,52,740

c.
New Sales Units = 3000 x 0.86 = 2580 units
New Selling Price = $98 per unit

	Per unit	2580 units
Sales Revenue	$            98	$           2,52,840
Less Variable Costs
Purchase cost	$            35	$              90,300
Sales Commission	$              4	$              10,320
Total Variable Costs	$            39	$           1,00,620
Contribution Margin	$            59	$           1,52,220
Less Fixed Costs		$              11,000
Net Operating Income		$           1,41,220

d.
New Purchase cost per unit = $35 + $9 = $44 per unit
New Selling Price per unit = $90 + $8 = $98 per unit
New Sales units = 3000 x 1.14 = 3420 units
New Fixed Cost = $11000 + $5500 = $16500

	Per unit	3420 units
Sales Revenue	$      98.00	$           3,35,160
Less Variable Costs
Purchase cost	$      44.00	$           1,50,480
Sales Commission	$        4.00	$              13,680
Total Variable Costs	$      48.00	$           1,64,160
Contribution Margin	$      50.00	$           1,71,000
Less Fixed Costs		$              16,500
Net Operating Income		$           1,54,500