The Saar Products Company sells Product A for $12 per unit.

Variable costs to make and sell the product are $6 per unit.

Fixed costs are $5 per unit at a normal volume of 600,000 units per year.

Sales volume recently has been equal to normal volume and is expected to continue at that level.

Current net income: $600,000

The assumptions in question #25 to question #27 for increased sales volume are mutually exclusive.

Evaluate the profitability of the three different alternative courses of action open to management. Compare each with the present situation. Show change in net income of each one.

The sales manager has suggested still another plan to boost sales volume.

• He would reduce the selling price by 10%.
• This price reduction would increase sales volume by 50%.
• This additional output could be achieved by an increase in fixed costs of $900,000 per year.

Net income will increase (decrease)

The production engineer has recommended a plan to improve product quality and, thereby, increase sales volume. His proposal would increase variable production costs by $.40 per unit on all units manufactured and fixed costs by $600,000 per year to pay for any needed additional capacity.

Sales volume would be increased by 150,000 units annually with no change in selling price.

Net income will increase (decrease)

Reimer has offered to buy from Saar Products Company 200,000 units of Product A each year at a price of $10 per unit. (This would be in addition to current sales of 600,000 units.)

• As these units would be distributed under Reimers private brand name, they would not adversely affect regular sales of Product A.
• The Saar Company could avoid $.50 of variable selling expenses for each of the 200,000 units sold under this proposed contract.
• Fixed production costs would have to be increased by an additional $750,000 in order to increase production volume to 800,000 units.

Net income will increase (decrease)