11. Neil believes that the quality of the product could be improved by spending $1.25 more per unit on better raw materials. The higher quality raw material will require improvements on the current manufacturing machinery, increasing fixed manufacturing overhead $75,000 per year, Neil also believes that increasing fixed selling expense by adding an advertising campaign at a cost of $25,000 per year will increase sales. The selling price per unit of Alph will remain at $47.00 per unit. Neil estimates that sales volume would increase 21.5%. Shipping costs will remain 20% of variable selling expense. Discuss the effect Neil's plan will have on net operating income, the breakeven point, and the degree of operating leverage of Xanadu Corp. 12. Geddy believes that sales volume can be increased by reducing some expenses and increasing advertising and promotional campaigns. Geddx proposed the following as an alternative to Neil's plan: (1) Reduce variable selling expenses by 20%, (2) increase sales commissions by $1.50 per unit, (3) increase fixed selling expenses by $60,000 and (4) to get products to customers faster, shipping costs will increase to 30% of variable selling expense. The selling price will remain $47 per unit. Geddy is confident that these changes will increase sales by 21.5%. Discuss the effect Geddxs plan would have on the net operating income, the breakeven point and the degree of operating leverage of Xanadu Corporation 13. Under each scenario, what impact would a 30% decline in sales have on operating income? 14. Which option, if either, would you recommend to Xanadu Corporation? Provide a well thought out explanation for your selection. 11. Neil believes that the quality of the product could be improved by spending $1.25 more per unit on better raw materials. The higher quality raw material will require improvements on the current manufacturing machinery, increasing fixed manufacturing overhead $75,000 per year, Neil also believes that increasing fixed selling expense by adding an advertising campaign at a cost of $25,000 per year will increase sales. The selling price per unit of Alph will remain at $47.00 per unit. Neil estimates that sales volume would increase 21.5%. Shipping costs will remain 20% of variable selling expense. Discuss the effect Neil's plan will have on net operating income, the breakeven point, and the degree of operating leverage of Xanadu Corp. 12. Geddy believes that sales volume can be increased by reducing some expenses and increasing advertising and promotional campaigns. Geddx proposed the following as an alternative to Neil's plan: (1) Reduce variable selling expenses by 20%, (2) increase sales commissions by $1.50 per unit, (3) increase fixed selling expenses by $60,000 and (4) to get products to customers faster, shipping costs will increase to 30% of variable selling expense. The selling price will remain $47 per unit. Geddy is confident that these changes will increase sales by 21.5%. Discuss the effect Geddxs plan would have on the net operating income, the breakeven point and the degree of operating leverage of Xanadu Corporation 13. Under each scenario, what impact would a 30% decline in sales have on operating income? 14. Which option, if either, would you recommend to Xanadu Corporation? Provide a well thought out explanation for your selection
