Question

Data for Jim's Landscaping are shown below: Per Unit % of Sales Selling Price $600 100% Variable Expenses $390 65 % Contribution Margin $210 35 %

Fixed Expenses are $500,000 per month and the company is selling 5,000 units per month.

7) The marketing manager believes that a $54,000 increase in the monthly advertising budget would increase monthly sales by 250 units (a 5% increase in sales). Should the advertising budget be increased? Yes or no? SHOW YOUR WORK

8) Jim's Landscaping Operation Manager believes that if they increase the quality of the components that the higher-quality product would increase sales by 10%. The higher quality components will cost an additional $20 per unit. Should the higher quality components be used? SHOW YOUR WORK

Answer 1

	Computation of Present net operating income :-
	Particulars		Per Unit	% of Sales
	Selling Price per unit		$                                                          600	100%
Less:	Variable Expenses per unit		$                                                          390	65%
	Contribution margin per unit		$                                                          210	35%
	Total Fixed Expenses per month		$                                                  500,000
	Present Sales per month (units)		5,000
	Particulars		Units	Per Unit	Total
	Sales		5,000	$                        600	$   3,000,000
Less:	Variable Expenses		5,000	$                        390	$   1,950,000
	Contribution margin				$   1,050,000
Less:	Fixed Expenses				$      500,000
	Net Operating income				$      550,000
7	Computation of revised net operating income :-
	Particulars
	Revised Sales per month (units) (5000+250)		5,250
	Revised Total Fixed Expenses per month (500000+54000)		$                                                  554,000
Contribution Income Statement
			Units	Per Unit	Total
	Sales		5,250	$                        600	$   3,150,000
Less:	Variable Expenses		5,250	$                        390	$   2,047,500
	Contribution margin				$ 1,102,500
Less:	Fixed Expenses				$      554,000
	Revised Net Operating Income				$      548,500
Decision:	No, the advertising budget should not be increased since it results in decrease in net operating income by (550000-548500) = $1500
8	Computation of revised net operating income :-
	Particulars
	Revised Sales per month (units) (5000+10% of 5000)		5,500
	Revised Variable Cost per unit (390+20)		$                                                          410
Contribution Income Statement
			Units	Per Unit	Total
	Sales		5,500	$                        600	$   3,300,000
Less:	Variable Expenses		5,500	$                        410	$   2,255,000
	Contribution margin				$   1,045,000
Less:	Fixed Expenses				$      500,000
	Revised Net Operating Income				$      545,000
Decision:	No, the higher quality component should not be used since it results in decrease in net operating income by (550000-545000) = $5000

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