The Bambola Doll Company produces a single product: an inexpensive plastic toy d
ID: 2560310 • Letter: T
Question
The Bambola Doll Company produces a single product: an inexpensive plastic toy doll. This item sells for $4.00 per unit, and has variable costs (manufacturing plus marketing) of $2.50 per unit. Monthly fixed costs amount to approximately $60,000. Last month, sales reached 100,000 units. Management would like to do some financial planning, the end result of which would—it is hoped— be even better future financial performance. As a management accountant you have been asked to construct a planning model and to conduct "what-if" analyses with the model you develop.
Management has told you to consider the following options, all of which have the potential to increase the profitability of the company:
A) Increase monthly promotional and advertising costs.
B) Increase raw material quality and increase the product selling price.
C) Increase the product selling price, with no increase in the raw material costs.
Required:
The sales manager of the company is fairly confident that a well-done marketing campaign could increase sales volume substantially, perhaps as much as doubling sales from the current position. The president of the company would like to increase operating profits by 50% over those of the most recent month. You are asked to determine how much the company could afford to spend on an intensive marketing campaign, in order to achieve the projected doubling of sales volume?
As an alternative to 1 above, assume that the company increases the quality of its raw materials going into the manufacturing of its product. This increase would result in a new variable cost per unit of $3.00. What is the required increase in selling price per unit that would be needed to maintain the same break-even volume as currently exists?
As a final alternative, assume that the company has decided to increase the selling price of its product by $1 per unit, with no accompanying marketing and promotion campaign. What is the unit sales volume needed, with the new selling price, for the company to make the same amount of profit as it did last month?
Explanation / Answer
CURRENT A-1 SALES UNIT 100000 200000 SP 4 4 REVENUE (4*100000) 400000 800000 Less VC 2.5 250000 500000 less FC 60000 -165000 (135000+500000-800000) OPERATING PROFIT 90000 DESIRED 135000 (150% OF 90000) ADD. EXP ON MKTING -105000 (165000-60000) CURRENT A-2 SALES UNIT 100000 40000 X SP 4 4.5 180000/40000 REVENUE (4*100000) 400000 180000 (profit+vc+fc) Less VC 2.5 250000 120000 less FC 60000 60000 OPERATING PROFIT 90000 0 BEP SV =FC/SP-VC 60000/4-2.5 40000 increase in sp = 4.5-4 = 0.5 CURRENT A-3 A-3 SALES UNIT 100000 X SP 4 5 REVENUE (4*100000) 400000 5X 300000 5*60000 Less VC 2.5 250000 2.5X 150000 less FC 60000 60000 60000 OPERATING PROFIT 90000 90000 90000 5X-2.5X-60000 = 90000 2.5X=150000 X=60000
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.