You are the Manager of a business and you are contemplating increasing customer service from 95% to 98% for your business to better service your customers needs. This means, you will have the product available 98-percent of the time when a customer wants to purchase it. The following are estimated to happen in your business:

Presume the following ...

Sales are currently $100,000,000

Labor would increase by $60,000

One-time direct materials would increase by $40,000

Transportation would increase $90,000

Rent would increase by $20,000 to accommodate the additional space to store inventory

Inventory would increase by $3,000,000

Fixed Overhead is $100,000 and does not need to be increased

Inventory carrying costs is 25%

Contribution margin on product is 30%

Inventory will be stored for 365 days.

Answer the Questions .... Do show the logic of how you arrived at your answers.

1) What expenses would you incur on the Income Statement to increase the service level from 95% to 98%. (list and/or calculate expenses for Income Statement)?

2) What will be the change to the Balance Sheet (your answer must be quantified)?

3) What is the Break Even Point in dollars?

4) What amount must sales be increased to for this to be a good decision?

5) If sales are projected to increase by 2%, would you spend the money to increase service levels? Why or why not? You must justify your answer with quantified analysis.

6) If sales are projected to increase 8%, would you spend the money to increase service levels? Why or why not? You must justify your answer with quantified analysis.