Monthly data

total per unit

Sales (400) Units 110,000 275

Variable Expenses44,000 110

Contribution Margin 66,000 165

Fixed Expenses 52,800

Net Income 13,200

a) Management is thinking of using plastic gearing rather than metal gearing. This change would reduce variable costs by $15. The marketing manager predicts that this would reduce the overall quality of the product and thus would result in a decline in sales to a level of 350 units per month. Is this going to result in a decline of sales?

b) assume they are currently selling 400 units per month. They want to increase sales and think they can by reducing the selling price by $25 per unit and increasing the advertising budget by $20,000 per month. They believe this will increase sales by 50%. ? Is this going to increase sales?

c) assume they are currently selling 400 units per month. Management wants to automate a portion of production process. The new equipment would reduce direct labour costs by $20 per unit but would result in amonthly rental cost for the new robotic equipment of $10,000. They believe that the new equipment will increase the reliability of the product, thus resulting in an increase in monthly sales of 12%. Should they make the change?