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Situation for Analysis: Grayslake Novelty produces and sells a small novelty item through tourist shops in Chicago and other northern Illinois locations. Last year the
Situation for Analysis: Grayslake Novelty produces and sells a small novelty item through tourist shops in Chicago and other northern Illinois locations. Last year the company sold 198,400 units of one of its products. The income statement for this product for last year is shown below: While this product has been profitable, as shown in the above income statement, sales began falling near the end of last year and have continued to decline this year. There is concern that new competitors are beginning to take market share from Grayslake Novelty. As a result of declining market share, Sarah Burroughs, the company president, has asked you to provide some information to assist her in making decisions about the company's strategy for this product. These alternatives should be evaluated individually. You are free and encouraged to offer your own alternative based on any of the parameters given in the data. b. One of the possible strategies (Alt 1 ) is to reduce the current price by 8%. Using last year's level of sales, what is the new contribution margin and break-even in units and dollars based on the price reduction? Additionally, compute the margin of safety, margin of safety ratio, and degree of operating leverage based on last year's sales. c. A second strategy (Alt 2) is to reduce the current variable cost by 0.20 per unit. The company has identified available efficiencies that can be implemented without any additional changes to the current cost. What is the new contribution margin and break-even in units and dollars based on the variable cost reduction of 0.20 per unit? Additionally, compute the margin of safety, margin of safety ratio, and degree of operating leverage based on last year's sales
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