Azucar Company produces a chocolate almond bar. Each bar sells for $0.40. The variable costs for each bar (sugar, chocolate, almonds, wrapper, labor, and so on) total $0.25. The to¬

tal fixed costs are $60,000. During the most recent year, 1 million bars were sold. The pres¬

ident of Azucar, not fully satisfied with the profit performance of the chocolate bar, was considering the following options to increase the bar's profitability: (1) increase advertising;

(2) increase the quality of the ingredients and, simultaneously, increase the selling price; (3)

increase the selling price; (4) combinations of the three.

Required:

1. The sales manager is confident that an advertising campaign could double sales vol¬

ume. If the company president's goal is to increase this year's profits by 50% over last year's, what is the maximum amount that can be spent on advertising?

2. Assume that the company increases the quality of its ingredients, thus increasing vari¬

able costs to $0.30. Answer the following questions:

a. How much must the selling price be increased to maintain the same break-even point?

b. What will the new price be if the company wants to increase the old contribution margin ratio by 50%?

3. The company has decided to increase its selling price to $0.50. The sales volume drops from 1 million to 800,000 bars. Was the decision to increase the price a good one? Com¬

pute the sales volume that would be needed at the new price for the company to earn the same profit as last year.

4. The sales manager is convinced that by increasing the quality of the ingredients (in¬

creasing variable costs to $0.30) and by advertising the increased quality (advertis¬

ing dollars would be increased by $100,000), sales volume could be doubled. He has also indicated that a price increase would not affect the ability to double sales vol¬

ume as long as the price increase is not more than 20% of the current selling price.

Compute the selling price that would be needed to achieve the goal of increasing profits by 50%. Is the sales manager's plan feasible? What selling price would you choose? Why?