Question
Due to the sluggish economy, the Constellation Company has experienced some difficulty in selling its deluxe microwave ovens. The following data relate to the current
Due to the sluggish economy, the Constellation Company has experienced some difficulty in selling its deluxe microwave ovens.
The following data relate to the current year:
Sales (9,000 units @ $100/unit) $ 900,000
Less variable costs (9,000 @ $60/unit) 540,000 Contribution margin $ 360,000 Less fixed costs 400,000 Net operating loss $ (40,000 )
Required:
1. Compute Constellation's annual breakeven point, in both units and dollars. Also, compute the contribution margin ratio.
2. The manager believes that a $40,000 increase in advertising would result in a $120,000 increase in annual sales. If the manager is right, what will be the net effect on the company's operating income?
3. Refer to the original data. The vice-president in charge of sales is certain that a 10% reduction in selling price in combination with a $30,000 increase in advertising will cause sales volume to increases by 50%. What effect would this strategy have on operating income of the company?
4. Refer to the original data. In the following year, Constellation saved $5 of total variable costs per oven by buying parts from a different manufacturer. However, Constellation's rent and insurance increased by $5,600. The store sold 11,000 bikes. What was its operating income for the year?
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