Sensitivity Analysis and Decision Making. Performance Sports produces inflatable rafts used for river rafting. Sales have grown slowly over the years, and cost increases are causing Performance Sports to incur losses. Financial data for the most recent year are shown.

Members of the management group at Performance Sports arrived at these three possible courses of action to return the company to profitability (each scenario is independent of the others):

1. Increase the sales price for each raft by 10 percent, which will cause a 5 percent drop in sales volume. Although sales volume will drop 5 percent, the group believes the increased sales price will more than offset the drop in rafts sold.

2. Decrease the sales price for each raft by 10 percent, which will cause an 8 percent increase in sales volume. Although the sales price will drop by 10 percent, the group believes an increase in rafts sold will more than offset the sales price reduction.

3. Increase advertising costs by $200,000, which will increase sales volume by 15 percent. Although fixed selling and administrative costs will increase by $200,000, the group believes the increase in rafts sold will more than offset the increase in advertising costs.

a. Calculate the projected operating profit (loss) for the option assigned, and determine whether the option is acceptable.

b. Discuss and document the advantages and disadvantages of the option assigned.

c. Discuss which option in the best.

Sales Variable costs $2,600,000 Cost of goods sold Selling and administrative costs $2,000 x 1.300 units) ($800 x 1,300 units) ( $300 x 1,300 units) $1,040,000 390,000 Total variable costs Contribution margin Fixed costs 1.430,000 $1,170,000 Cost of goods sold Selling and administrative costs $800,000 400,000 Total fixed costs Operating loss 1,200,000 30