Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

(1 x 5 = 5 marks) II. Problem solving question- Saldina Hardware is organized into 3 departments. The following sales and cost data are available

(1 x 5 = 5 marks)

II. Problem solving question-

Saldina Hardware is organized into 3 departments. The following sales and cost data are available for the prior year.

Dept A Dept B Dept C

Sales $265,000 $850,000 $900,000

Variable costs 106,000 510,000 720,000

Contribution Margin 159,000 340,000 180,000

Less fixed costs 60,000 85,000 92,000

Profit 99,000 255,000 88,000

Required:

a. What is the weighted average contribution margin ratio?

b. What level of sales is needed to earn a profit of $500,000 assuming the current mix?

c. Saldina Hardware places an advertisement in the local paper each week. All else equal, which department would you emphasize in the advertisement?

(7 marks)

III. Case Study:

Tenneco Inc., produces 3 models of tennis rackets: standard, deluxe, and pro. Sales information for 2015 follows:

Standard Deluxe Pro

Sales (in units) 100,000 50,000 50,000

Sales price per unit $30 $40 $50

Variable manufacturing cost per unit $17 $20 $25

Fixed manufacturing support costs are $800,000, and fixed selling and administrative costs are $400,000. In addition the company pays its sales representatives a commission equal to 10% of the price of each racket sold.

Required:

a. If the sale price of deluxe rackets decreases by 10%, its sales are expected to increase 30%, but sales of standard rackets are expected to decrease by 5% as some potential buyers of standard rackets will upgrade to deluxe rackets. What will be the impact of this decision on Tennecos profits?

b. Suppose that Tenneco decides to increase its advertising by $50,000 instead of cutting the price of standard rackets. This is expected to increase the sales of all 3 models by 2% each. Is this decision advisable?

c. The incentive created by sales commissions has led Tennecos sales force to push the higher-priced rackets more than the lower priced ones. Is this in the best interest of the company.

(8 marks)

(1 x 5 = 5 marks)

II. Problem solving question-

Saldina Hardware is organized into 3 departments. The following sales and cost data are available for the prior year.

Dept A Dept B Dept C

Sales $265,000 $850,000 $900,000

Variable costs 106,000 510,000 720,000

Contribution Margin 159,000 340,000 180,000

Less fixed costs 60,000 85,000 92,000

Profit 99,000 255,000 88,000

Required:

a. What is the weighted average contribution margin ratio?

b. What level of sales is needed to earn a profit of $500,000 assuming the current mix?

c. Saldina Hardware places an advertisement in the local paper each week. All else equal, which department would you emphasize in the advertisement?

(7 marks)

III. Case Study:

Tenneco Inc., produces 3 models of tennis rackets: standard, deluxe, and pro. Sales information for 2015 follows:

Standard Deluxe Pro

Sales (in units) 100,000 50,000 50,000

Sales price per unit $30 $40 $50

Variable manufacturing cost per unit $17 $20 $25

Fixed manufacturing support costs are $800,000, and fixed selling and administrative costs are $400,000. In addition the company pays its sales representatives a commission equal to 10% of the price of each racket sold.

Required:

a. If the sale price of deluxe rackets decreases by 10%, its sales are expected to increase 30%, but sales of standard rackets are expected to decrease by 5% as some potential buyers of standard rackets will upgrade to deluxe rackets. What will be the impact of this decision on Tennecos profits?

b. Suppose that Tenneco decides to increase its advertising by $50,000 instead of cutting the price of standard rackets. This is expected to increase the sales of all 3 models by 2% each. Is this decision advisable?

c. The incentive created by sales commissions has led Tennecos sales force to push the higher-priced rackets more than the lower priced ones. Is this in the best interest of the company.

(8 marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Corporate Finance

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan

12th edition

1259918947, 1260091908, 978-1259918940

More Books

Students also viewed these Accounting questions

Question

Is this issue more complex than it seems?

Answered: 1 week ago

Question

1. What will happen in the future

Answered: 1 week ago

Question

3. Avoid making mistakes when reaching our goals

Answered: 1 week ago