Activity 2: CVP Analysis for Sports-Strength

Sports-Strength has just received notice from J&B Sports that the price of a soccer jersey will be increasing to $15.30 next year. In response to this increase, Sports- Strength 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 $10,000 in additional advertising targeted directly to current customers will allow the sales force to reach the current year's sales volume of 51,975 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 Sports-Strength has had access to in the past. The cost of the campaign is expected to be $5,000. 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 6% to 4% of sales and increase sales salaries by $22,000. The campaign is expected to generate an additional 10% in sales volume.

Required: Using the information in Exhibit 2 as a starting point, answer the following questions: a. What is Sports-Strength's breakeven point in units and dollars before any of the above changes take place (ie. given the sale price and cost structure indicated in Exhibit 2)? b. What was Sports-Strength's margin of safety in units and dollars in the year ending 30th July 2021? c. How much would operating income decrease if Sports-Strength did nothing to recover the increase in cost of goods sold, all other things being equal? d. Determine the expected operating income under each proposed sales and marketing plan. e. Why does the first plan result in the reduction in operating income that is greater than the $10,000 advertising? f. Which plan do you recommend to management? Write a memo in the proper format which justifies your recommendation by providing relevant and appropriate supporting information. Include and explain any qualitative factors which may affect your recommendation.