Situation for Analysis: Grayslake Novelty produces and sells a small novelty item sold through tourist shops in Chicago and other northern Illinois locations. Last year the company sold 198,400 units. The income statement for Grayslake Novelty for last year is shown below:

Sales	$992,000
Less: Variable Expenses	545,600
Contribution Margin	446,400
Less: Fixed Costs	180,000
Net Operating Income	$266,400

While the company 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, Sarah Burroughs, the company president, has asked you to provide some information to assist her in making some decisions. These alternatives should be evaluated individually as stated. You are free to offer your own alternative based on any of the parameters given in the data.

Required:

a. While the company is currently profitable, the president wants to know the breakeven in both units and dollars at this level of sales. Additionally, compute the margin of safety and margin of safety ratio based on last years sales. Also, indicate the degree of operating leverage at the current level of sales.

b. One of the possible strategies (Alt 1) is to reduce the current price by 8%. What is the new break-even in units and dollars based on the price reduction?

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 changes to the current cost. What is the new break-even in units and dollars based on the variable cost reduction of 0.20 per unit?

d. A third strategy (Alt3) is to decrease the current price by 8% and reduce the variable cost per unit by 0.20. What is the new break-even in units and dollars based on making both changes?

e. A final strategy (Alt 4) under consideration is to invest in more automated equipment for the manufacturing process. This investment will reduce variable costs by 0.65 per unit, primarily reducing the direct labor. At the same time, this will increase the fixed costs by $50,000. What is the break-even in units and dollars based on this change in operating structure?

Submission Instructions:

Write a business memo (format is in the second document of this assignment) to the president recommending the best course of action based on your analysis. In your memo, discuss changes in break-even points, and impacts to the operating leverage. Including a table summarizing your findings would be appropriate. Assume that the long-range plan is to grow sales to 250,000 units in the next two to three years. In your memo, summarize the advantages and disadvantages of any of the alternatives. Critically evaluate the alternatives based on current market conditions and any impact each alternative may have on the long-range plan. If you recommend a change in operating structure (Alt 4), be sure to include comments on any changes in risk with your recommendation.

Clearly state your recommended course of action explaining why your recommendation is the best for the company. Your memo should be at least one page, but no longer than two full pages. You may also attach an Excel spreadsheet that shows all your calculations.