. Key Concepts Break Even - Incremental Expenses on Income Statement/Contribution Margin % Expenses are items that show up on the Income Statement or Profit/Loss Inventory by itself is not an expense. Inventory is an asset and shows up on the balance sheet. Inventory Expense for Full Lot Inventory Profile - Inventory Inventory Carrying Cost % Days/365 Fixed Overhead is not an incremental expense on the Income Statement. It is "Fixed" You do not factor "Fixed Overhead" into this analysis unless you need to increase your Overhead to increase the service level. . The Business Scenario You are the Manager of a business. It could be a retailer, distributor or manufacturer. You are contemplating increasing customer service from 95% to 98% for your business to better service your customers needs. This means, you will have the product available 98-percent of the time when a customer wants to purchase it. The following are estimated to happen in your business: Assumptions: Sales are currently $80,000,000 Labor would increase $34,000 Direct materials (one-time increase) $40,000 Transportation would increase $60,000 Rent would increase $18,000 to accommodate the additional space to store the inventory Inventory would increase by $3,000,000 Fixed overhead is $100,000 and does not need to be increased above its current level. Inventory carrying cost - 25% Contribution Margin on the product -30% You will make the inventory permanent, meaning it will be stored for 365-days Questions to Answer For your solution write-up, you must show work to receive credit or partial credit. Questions to Answer For your solution write-up, you must show work to receive credit or partial credit. 1. What expenses would you incur on the Income Statement to increase the service level from 95% to 98%. (list and/or calculate expenses for Income Statement) 2. What will be the change to the Balance Sheet (your answer must be quantified)? 3. What is the Break Even Point in dollars? 4. What amount must sales be increased to for this to be a good decision? 5. If sales are projected to increase by 2%, would you spend the money to increase service levels? Why or why not? You must justify your answer with quantified analysis. 6. If sales are projected to increase 8%, would you spend the money to increase service levels? Why or why not? You must justify your answer with quantified analysis