Question

O3Uaivenal Spots Exchangehas jst received aotice from C&C Sports that the price of a baseball jervey will be increaing to $15.30 sext year lo resposse to this incrense Uaiversal is planning its sales and marketing campsin for the coming yeac Managers have developed two posble plans and have aked you to evalate them The fiest plas calls for pasing on the entice 50.50 cost increase to customens throegh an incresse in the sales price Managers believe that $10,000 in additional adertising targeted directly to cureat customers will allow the sales force to reach the current year's sales volume of $1.975 jerseys The second plan relies on a new advert sang campaign that fenses ontbe salesprce rema nang the same as๒t year. Thecampagn would inchade anow databiethat ellen more poteatial customers than Universal bas had access to in the past. The cost of the campaign is expected to be $5,000 Managers believe that the campaign will be more succesfal generatingorw salesthanthe current incentivt-based sales andmarketingplaa Aianesult they want to rehace the sales con misuontom 6% to 4% ofsales and increase sales salanes by S22,000. Thecampaign is expected to generate an adinonal 10% n sales volume. Using the information in Exhibit 3.1 as a starting point, answer the following questions Required )How much would operating income decrease if Uaiversal did nothing to recover the increase in cost of goods sold,all other things equail b)Determine the expected operating income under each proposed sales and marketing plan (c) Why does the first plan result in a reductios in operating income that is greater than the $10,000 advertising? (d) Which plan do you recommend to managemeor? Why? UNIVERSAL SPORTS EXCHANGE Contribution Format Income Statement for the 52 Weeks Ending February 1,2017 Per Unit Ratio Sales $1,039,500 $20.00 100% Less Variable expenses: Cost of goods sold Sales commissions 14.80 74% 1.20 6% 16.00 80% 207,900 $4.00 20%, $769.230 62,370 Total variable expenses 831,600 Contribution margin Less Fixed expenses: Selling expenses Administrative expenses 116,500 51,500 Total fixed expenses 168,000 perating income S 39.900

Answer 1

a.Decrease in Operating Income= Number of jerseys sold*Increase in cost per jersey

= 51,975*0.50 = $25,987.5

b.

	Plan 1	Plan 2
Sales	1,065,487.5	1,143,450
Less: Cost of goods sold	795,217.5	874,739.25
Sales Commission	63,929.25	45,738
Total Variable Expenses	859,146.75	920,477.25
Contribution Margin	206,340.75	222,972.75
Less: Fixed Expenses
Selling Expenses	116,500	138,500
Administrative Expenses	51,500	51,500
Cost of Campaign	10,000	5,000
Total Fixed Expenses	178,000	195,000
Operating Income	28,340.75	27,972.75

c)Reduction in income is greater than $10,000 since the sales commission is paid as a percentage on sales. With increase in sales price, cost of commission has increased.

d)I recommend plan A, because it results in higher operating income.