Grover's Steel Parts produces parts for the automobile industry. The company has monthly fixed expenses of $640,000 and a contribution margin of 75% of revenues. Grover feels like he's in a giant squeeze play: The automotive manufacturers are demanding lower prices, and the steel producers have increased raw material costs. Grover's contribution margin has shrunk to 55% of revenues. The company's monthly operating income, prior to these pressures, was $132,500. Read the requirements. Requirement 1. To maintain this same level of profit, what sales volume in sales revenue) must Grover now achieve? Begin by identifying the formula to compute the sales in units at various levels of operating income using the contribution margin approach. = Target sales in dollars Requirements 1. To maintain this same level of profit, what sales volume (in sales revenue) must Grover now achieve? 2. Grover believes that his monthly sales revenue will only go as high as $1,030,000. He is thinking about moving operations overseas to cut fixed costs. If monthly sales are $1,030,000, by how much will he need to cut fixed costs to maintain his prior profit level of $132,500 per month? Tuffet Seating Company is currently selling 2,500 oversized bean bag chairs a month at a price of $78 per chair. The variable cost of each chair sold includes $30 to purchase the bean bag chairs from suppliers and a $5 sales commission. Fixed costs are $8,000 per month. The company is considering making several operational changes and wants to know how the change will impact its operating income. Read the requirements. Requirement 1. Prepare the company's current contribution margin income statement. (Use parentheses or a minus sign for an operating loss.) Tuffet Seating Company Requirements Contribution Margin Income Statement Sales revenue Variable expenses: Cost of goods sold Operating expenses Contribution margin Fixed expenses Operating income (loss) 1. Prepare the company's current contribution margin income statement. 2. Calculate the change in operating income that would result from implementing each of the following independent strategy alternatives. Compare each alternative to the current operating income as you calculated in Requirement 1. Consider each alternative separately. a. Alternative 1: The company believes volume will increase by 20% if salespeople are paid a commission of 7% of the sales price rather than the current $5 per unit. b. Alternative 2: The company believes that spending an additional $8,000 on advertising would increase sales volume by 15%. c. Alternative 3: The company is considering raising the selling price to $90, but believes volume would drop by 12% as a result. d. Alternative 4: The company would like to source the product from domestic suppliers who charge $13 more for each unit. Management believes that the "Made in the USA" label would increase sales volume by 20% and would allow the company to increase the sales price by $14 per unit. In addition, the company would have to spend an additional $2,000 in marketing costs to get the word out to potential customers of this change
