Universal Sports Exchange has just received notice from C&C  Sports that the price of a baseball jersey will be increasing to $22.50 next year. In response to this increase, Universal is planning its sales and marketing campaign for the coming year. Managers have  developed two possible plans and have asked you to evaluate them.

The first plan calls for passing on the entire $0.50 cost increase to customers through an increase  in the sales price. Managers believe that $20,000 in additional advertising targeted directly to current  customers will allow the sales force to reach the current year’s sales volume of 54,000 jerseys.

The second plan relies on a new advertising campaign that focuses on the sales price remaining  the same as last year. The campaign would include a new database that offers more potential customers than Universal has had access to in the past. The cost of the campaign is expected to be $25,000.  Managers believe that the campaign will be more successful in generating new sales than the current  incentive-based sales and marketing plan. As a result, they want to reduce the sales commission from 5% to 3% of sales and increase sales salaries by $35,000. The campaign is expected to generate an additional 10% in sales volume.

Using the information in Exhibit 3.1 as a starting point, answer the following questions.

Exhibit 3.1:

Required

a. How much would operating income decrease if Universal did nothing to recover the increase in  cost of goods sold, all other things equal? Round all amounts to two decimal places.

b. Determine the expected operating income under each proposed sales and marketing plan. Round  all amounts to two decimal places.

c. Why does the first plan result in a reduction in operating income that is greater than the $20,000  advertising?

d. Which plan do you recommend to management? Why?

Transcribed Image Text:

B D. 1 Universal Sports Exchange 2 Income Statement 3 for the 52 weeks ended January 30, 2021 4 Per Unit Ratio $ 30.00 6 Sales 7 Less: variable expenses $1,620,000 100% Cost of goods sold $ 1,188,000 22.00 73% 8 1.50 0.50 Sales commissions 81,000 5% 10 Tags 27,000 2% Total variable expenses 1,296,000 324,000 11 24.00 80% 12 Contribution margin $ 6.00 20% 13 Less: fixed expenses 14 Selling 145,000 15 Administrative 95,000 Total fixed expenses 240,000 84,000 16 17 Operating income