PARAMETERS FOR BASELINE CASE
The following numbers are estimates for the upcoming year for a manufacturing company.
Since the company is effective at implementing a JIT inventory system, assume there is
no beginning or ending inventory.
No. of units sold	120,000
Selling price per unit	$240.00
	Fixed Expenses	Variable Expenses (per unit sold
Production costs:
Direct materials		$18.00
Direct labor		36.00
Factory overhead	$2,160,000	24.00
Marketing expenses:
Sales salaries and commissions	540,000	7.50
Advertising	360,000
Miscellaneous mktg. expenses	108,000
Administration expenses:
Office salaries	720,000
Supplies	105,000	1.50
Miscellaneous admin. expenses	72,000
TOTAL EXPENSES	$4,065,000	$87.00
Contribution Margin Income Statement
Sales Revenues (120,000 Units at $240)		$28,800,000.00
Variable Costs:
Direct Materials (120,000 Units at $18)	$2,160,000
Direct Labor (120,000 Units at $36)	$4,320,000
Variable factory Overhead (120,000 x $24)	$2,880,000
Variable selling expenses (120,000 x 7.50)	$900,000
Variable Adminstrative Expenses (120,000 x 1.50)	$180,000
Total Variable Cost		$10,440,000.00
Contribution Margin (Sales - Total Variable Cost)		$18,360,000.00
Total Fixed Costs		$4,065,000.00
Operating Income		$14,295,000.00
Contribution Margin Per Unit (B11 - C26)
=Unit selling price Unit total variable cost
=$240 - $87
=$153 per unit
Contribution Margin Percentage (A43 / B11 * 100)
=Unit Contribution Margin / Unit Selling Price * 100
=$153 / $240 * 100
=63.75%
Breakeven Point in Units (C40 / A51)
=Total Fixed Costs / Contribution Percentage
=$4,065,000 / 63.75%
=$6,376,471

You want to determine whether the following four suggestions (i.e., e, f, g, h) would improve the companys performance. Determine the effects of each suggestion on operating income, contribution margin per unit, contribution margin percentage, breakeven point in units, and breakeven point in sales dollars.

Calculate the effects of each suggestion independently of the other suggestions. In other words, use the original baseline case data and make the first change (e); use the original baseline case data and make the second change (f); and so on. However, do not overwrite the original baseline case. The easiest way to do this is to copy the original data to a new sheet and then replace the original data parameters. To copy a sheet, click on the sheet name. Select Move or Copy. Click on the Create a copy box. Click OK. Rename your new sheet to indicate the name of the new scenario. For example, you could name the sheet for (e) Commission. To rename a sheet, right click on the sheet name. Select Rename. Key in the new name.

Put all personnel on commission. This action would affect the sales salaries and commissions expense by eliminating the fixed portion and increasing the variable portion by $4.50 per unit. Sales would increase by 44,000 units.

Redesign the package for the product. This would decrease the variable direct materials cost by $1.50 per unit but would increase the fixed factory overhead by $36,000.

Launch a new advertising campaign. This would increase fixed advertising expense by $348,000 but would increase sales volume by 4,800 units.

Reduce the selling price of the product by $15.00 per unit. This would increase sales volume by 16,800 units.