A contribution format income statement for the most recent year for Big Bear Con
ID: 462865 • Letter: A
Question
A contribution format income statement for the most recent year for Big Bear Consumer Electronics Inc. is shown below.
Total Department
AM/FM radios
HD radios
Sales
$320,000
100%
$270,000
100%
$50,000
100%
Less variable expenses
236,000
74%
216,000
80%
20,000
40%
Contribution Margin
84,000
26%
54,000
20%
30,000
60%
Less Traceable Fixed Expenses
15,000
5%
10,000
4%
5,000
10%
Segment Margin
69,000
22%
$44,000
16%
$25,000
50%
Less Common Fixed Expenses
40,000
13%
Net Operating Income
$29,000
9%
PROBLEM BACKGROUND:
Shortly after graduating with a business degree from Bridgewater State University, you are hired as an assistant to the District Manager of a national consumer electronics chain.
During your first day on the job, you attend a meeting regarding product lines carried by the chain. You learn about a fairly new innovation called HD (high definition) radio. This product allows consumers to listen to not only traditional AM and FM bands, but also to the newly created HD frequencies that most local radio stations are broadcasting free of charge to listeners on adjacent frequencies that previously were unused. Unlike satellite radio, this service requires no subscription charges. Consumers who have heard HD radio tell you that AM-HD broadcasts sound like FM and FM-HD broadcasts sound like CD quality!
Due to improved manufacturing technologies, the cost to manufacture HD radios has dropped dramatically.
PROBLEM:
Your boss (the District Manager) has authorized you to spend $10,000 for advertising for one of your chain’s local stores, promoting one of their product lines. A Marketing Research class at Bridgewater State University conducted a study indicating that the additional advertising would increase sales of the AM/FM radios by $50,000 and increase sales of the HD radios by only $45,000.
The local store manager (who never took a course in Managerial Accounting) argues that the advertising budget should be spent on the AM/FM radios because it will result in more sales dollars. The store manager also argues that the AM/FM radio line’s total sales are substantially higher than the HD line, therefore as the biggest selling item, it should receive all advertising allotments
c) What form of media would you recommend using to advertise your chosen product line? (explain why)
d) Are there any “implicit” considerations that should enter the decision on which product line to promote?
Total Department
AM/FM radios
HD radios
Sales
$320,000
100%
$270,000
100%
$50,000
100%
Less variable expenses
236,000
74%
216,000
80%
20,000
40%
Contribution Margin
84,000
26%
54,000
20%
30,000
60%
Less Traceable Fixed Expenses
15,000
5%
10,000
4%
5,000
10%
Segment Margin
69,000
22%
$44,000
16%
$25,000
50%
Less Common Fixed Expenses
40,000
13%
Net Operating Income
$29,000
9%
Explanation / Answer
C) Let's analyze the problem once.
1) As per the case, sales of AM/FM is higher than HD
2) Cost of manufacturing HD got cheaper
3) People prefer AM/FM radios
4) Advertisement in AM/FM will increase more sales than HD
As per the case, people who buy HD radio, can use not only AM/FM but also HD lines which are given for free by local radio stations. But most of them buy AM/FM radio. This is maybe due to the cost of the AM/FM radio must be much lesser than HD radio.
I feel there is no much difference when it comes to increased sales while advertising the AM/FM and HD radio. And people prefer both AM/FM radio and HD radio. When it comes to quality, they feel HD is much better than AM/FM. In that case, advertising for HD is better.
As per my opinion, by advertising HD, people would know about the product and maybe they could change their decision by buying HD instead of AM/FM.
D) Implicit considerations for considering the decision of buying HD radio is - The future ultimately lies with HD. So, people might consider that point before buying the product. So, for taking a decision on what product to promote, the implicit consideration lie with the future and the technology advancement.
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