Sunflower Company manufactures and sells a product called “Sunshine”. Using regr
ID: 2413034 • Letter: S
Question
Sunflower Company manufactures and sells a product called “Sunshine”. Using regression analysis, company has determined the monthly behavior of manufacturing, selling, and administrative costs as follows:
Total Fixed Costs Variable per Unit
Manufacturing $350,000 $2.50
Selling $110,000 $1.10
Administrative $140,000 $0.40
Current selling price per unit of Sunshine is $10. The production capacity is up to 300,000 units per month and currently company is manufacturing and selling 150,000 units of Sunshine per month.
1. Because of decline in sales in recent month, company wants to increase advertising by $90,000. What should be the minimum expected increase in sales units in order to justify this advertising proposal?
2. Company believes that by reducing selling price by $1.00 can increase sales units by 40,000 units. Should this proposal be accepted? Why?
3. Company wants to hold a two-week sale at a nearby Shopping Mall. The Mall has offered two options for use of space in a store in the Mall.
Option 1: A fixed payment of $24,000 for the sale period
Option 2: $3,000 plus 10% of total sales earned during the sale period
Develop a model to facilitate the decision making by Company in this regard.
4. Company has determined the following possible sales scenarios with associated probability in the
Shopping Mall. Given this data, which of the two options should company choose? Why?
Sales Units Probability
3,000 10%
4,000 20%
5,000 40%
6,000 20%
7,000 10%
Explanation / Answer
(1) SP per unit = $10
VC per unit (2.50 + 1.10 + 0.40) = $4
Contribution per unit = $6
Advertising Increase by = $90000
Need to increase unit sales = 90000/6 = 15000 units
(2)
Before
After
Sale
(150000 * 10)
=1500000
(190000 * 9)
=1710000
(-) VC
(150000 * 4)
=600000
(190000 * 4)
=760000
Contribution
900000
950000
This Proposal need to be accepted
(3 & 4)
Expected Sale = (3000 * 10%) + (4000 * 20%) + (5000 * 40%) + (6000 * 20%) + (7000 * 10%) = 5000 units
Option 1 = Fixed Payment of $24000
Option 2 = 3000 + 10% of sale
3000 + 10% * (5000 *10) = 8000
Option 2 is need to be selected
Before
After
Sale
(150000 * 10)
=1500000
(190000 * 9)
=1710000
(-) VC
(150000 * 4)
=600000
(190000 * 4)
=760000
Contribution
900000
950000
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