Question
Answer the question below based on the following scenario: A company has $1,000,000 in annual sales and the owner pays himself 100% of profits. The
Answer the question below based on the following scenario:
A company has $1,000,000 in annual sales and the owner pays himself 100% of profits. The cost-of-goods-sold is $900,000. The company manufactures 9,000 units each year. The present defect rate is about 3%. Assume that the price/unit is based on this information and is equal in each of the scenarios.
Also, 1) the cost/unit is calculated by dividing the number of saleable units by the total cost of goods sold and, 2) the price is assumed to remain at the same rate as the units are being sold at in the current situation.
Complete the blank cells and answer the question.
| Current Situation | Alternative Situation #1 | Alternative Situation #2 | |
| # of Units Produced | 9,000 | 9,000 | |
| # of Saleable Units | 8,730 | 8,910 | |
| Total Sales | $1,000,000 | $1,199,921 | $1,020,551 |
| Total Production Cost of Goods Sold | $900,000 | $1,080,000 | $900,000 |
| Price/Unit | $114.54 | $114.54 | $114.54 |
| Cost per Unit | $103.09 | 103.09 | $100 |
| Defect Rate | 3% | 3% | 1% |
| Unsaleable Units | 270 | 324 | |
| Net Profit | $100,000 |
Question: Which of the following two strategies is the most profitable?
| Increase quality, reduce defects to 1% from 3% | ||
| Implement sales campaign to increase sales by 20% |
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Corporate Finance Core Principles and Applications
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford
3rd edition
978-0077971304, 77971302, 978-0073530680, 73530689, 978-0071221160, 71221166, 978-0077905200
