#1 If we spend $500 on t-shirts, bottle openers and glasses, then we can expect
ID: 2561546 • Letter: #
Question
#1 If we spend $500 on t-shirts, bottle openers and glasses, then we can expect to sell another 100 cases of beer. Do you recommend we do this advertising campaign? How much will Net income go up, or down? (INCREMENTAL ANALYSIS)
One case of Pale Ale per unit Selling price $25 current volume 26,000 cases (24 beers in a case) malts $2.60 hops $2.40 yeast $0.50 packaging $5.00 *other production costs $4.50 *5 gallons of water for every gallon of beer, CO2, utilities, taxes shipping $1.75 selling $1.25 total variable costs $18.00 total fixed up to 28,000 capacity Salary brewer $1.15 $30,000.00 Salalry driver $0.77 $20,000.00 rent $1.92 $50,000.00 truck $0.92 $24,000.00 promotion exp $0.19 $5,000.00 total costs $22.96Explanation / Answer
without ad campaign with ad campaign Incremental income Sales (rate * volume) $ 650,000 $ 652,500 $ 2,500 Less: Variable costs($18 x volume) 468,000 469,800 1,800 Contribution margin $ 182,000 $ 182,700 $ 700 Less: Fixed Costs Salary brewer 30,000 30,000 - Salalry driver 20,000 20,000 - rent 50,000 50,000 - truck 24,000 24,000 - promotion exp 5,000 5,000 - Ad campaign 500 500 Total fixed costs $129,000.00 $129,500.00 $500.00 Net Income $53,000.00 $53,200.00 $200.00 Since net incremental income is $200, we should take up ad campaign.
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