Chapter 1-In class Exercise Options fro Increasing Contribution Table 1.1 Inc Re

Question

Chapter 1-In class Exercise Options fro Increasing Contribution Table 1.1 Inc Rev 50% Current Marketing Finance/Accounting OM option option option Sales $100,000 $150,000 $100,000 100,000 Cost of Goods (80,000) (120,000) (80,000) (64,000) Gross Margin 20,000 30,000 20,000 36,000 Finance Costs (6,000) (6,000) (3,000) (6,000) Subtotal 14,000 24,000 17,000 30,000 Taxes 3,500 6,000 4,250 7,500 Contribution $10,500 $18,000 $12,750 $22,500 Input Table Tax Rate 0.25 Managerial Report: We analyzed three different options for increasing our bottom line contribution. Although all three were succesful at increasing our profit margins, the best option is the reduce operation production costs by 20% and therefore, have a new profit if $22,500. It also seems the most practical and feasible option.

SOLUTION c Given the conditions of our brief example, Fisher Technologies has increased contribution

from $10,500 to $22,500. It may now have a bank willing to lend it additional funds.

INSIGHT c The OM option not only yields the greatest improvement in contribution but also may be

the only feasible option. Increasing sales by 50% and decreasing finance cost by 50% may both be virtually

impossible. Reducing operations cost by 20% may be difficult but feasible.

LEARNING EXERCISE c What is the impact of only a 15% decrease in costs in the OM option?

[Answer: A $19,500 contribution; an 86% increase.]

Chapter 1-1n class Exercise options fro Increasing Contribution Table 1.1 Inc Rev 50% urren nance ccount option option option 100,000 150,000 Sale 100,000 100,000 Cost of Goods l80,000 120,000) 30,000 20,000 36,000 Gross Margin 20,000 Finance costs 16.0001 Doom 13,000) (6,000) Subtotal 14,000 24,000 17,000 30,000 Taxes 3,500 6,000 4,250 7,500 Contribution s 10,500 S 18,000 S 12,750 S 22,500 nput Table Managerial Report: We analyzed three different options for increasing our bottom line contribution. Although all three were succesful at increasing our profit margin the best option is the reduce operation production co

Explanation / Answer

The reduction in cost of goods by 15% will result in a Contribution of 19500

% increase = (19500 - 10500)/10500 *100

= 86 %

Current 15% decrease Sales 100000 100000 Cost of goods 80000 68000 Gross Margin 20000 32000 Finance Costs 6000 6000 Subtotal 14000 26000 Taxes 3500 6500 Contribution 10500 19500 Tax Rate 0.25

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