Comfy Seating Company is currently selling 3,500 oversized bean bag chairs a month at a price of $100 per chair. The variable cost of each chair sold includes $60 to purchase the bean bag chairs from suppliers and a $4 sales commission. Fixed costs are $6,000 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 15% if salespeople are paid a commission of 10% of the sales price rather than the current $4 per unit.
b. Alternative 2: The company believes that spending an additional $5,000 on advertising would increase sales volume by 10%.
c. Alternative 3: The company is considering raising the selling price to $120, but believes volume would drop by 25% as a result.
d. Alternative 4: The company would like to source the product from domestic suppliers who charge $12 more for each unit. Management believes that the "Made in the USA" label would increase sales volume by 15% and would allow the company to increase the sales price by $5 per unit. In addition, the company would have to spend an additional $3,000 in marketing costs to get the word out to potential customers of this change.