Universal Sports Exchange has just received notice from C&C Sports that the price of a baseball jersey will be increasing to $22.50 next year. In response to this increase, Universal is planning its sales and marketing campaign for the coming year. Managers have developed two possible plans and have asked you to evaluate them. The first plan calls for passing on the entire $0.50 cost increase to customers through an increase in the sales price. Managers believe that $20,000 in additional advertising targeted directly to current customers will allow the sales force to reach the current years sales volume of 54,000 jerseys. The second plan relies on a new advertising campaign that focuses on the sales price remaining the same as last year. The campaign would include a new database that offers more potential customers than Universal has had access to in the past. The cost of the campaign is expected to be $25,000. Managers believe that the campaign will be more successful in generating new sales than the current incentive-based sales and marketing plan. As a result, they want to reduce the sales commission from 5% to 3% of sales and increase sales salaries by $35,000. The campaign is expected to generate an additional 10% in sales volume.

UNIVERSAL SPORTS EXCHANGE Income Statement for the 52 Weeks Ended Janauary 30, 2021
						Per Unit		Ratio
Sales				$1,620,000		$30.00		100%
Less: Variable expenses
Cost of goods sold		$1,188,000				22.00		73%
Sales commissions		81,000				1.50		5%
Tags		27,000				0.50		2%
Total variable expenses				1,296,000		24.00		80%
Contribution margin				324,000		$6.00		20%
Less: Fixed expenses
Selling		145,000
Administrative		95,000
Total fixed expenses				240,000
Operating income				$84,000

Why does the first plan result in a reduction in operating income that is greater than the $20,000 advertising? (Refer to C & C Sports Continuing Problem 3-41) Which plan do you recommend to management? Why?