Instructions

Your small manufacturing operation has the following information concerning the main product:

Current Situation:
Sales in Units	4,000
Sales in Dollars	720,000
less: Variable Costs	400,000
Contribution Margin	320,000
less: Fixed Costs	300,000
Operating Income	20,000

Your manager has asked you to prepare operating income estimates for these three following options.

Option 1 = This scenario assumes a 5% increase in sales volume (units) over the Current Situation as a result of 20,000 of increased advertising. As well, a $10 decrease in per unit variable cost can be realized as a result of new, automated production equipment. The new equipment will increase depreciation expense by $25,000.

Option 2 = The sales manager believes that a $5 decrease in the sales price per unit will result in a 10% increase in sales volume (units) from the Current Situation, however, this will need to be accompanied by $30,000 of increased advertising. Assume that the automation described above in Option 1 will be applied in this scenario as well.

Option 3 = If no additional dollars are spent for advertising, the sales manager predicts sales volume will drop 100 units from the Current Situation. Assume the same decrease in per unit variable costs, and increased depreciation expense, as in Options 1 and 2 above.