Question

You company sells inflatable suitcases that get bigger or smaller depending on the amount of clothing inside them.  Each suitcase costs $40 to manufacture, and you sell them for an average of $110 per unit. It costs $5,000 per day to operate your factory (which is your only fixed cost).

Noted travel writer Angelina Kumars has offered to endorse your suitcase for $36,500 per year ($100/day). You believe that, with Ms. Kumars' endorsement, you will sell an average of 120 units per day.

Do you recommend that the company hire Ms. Kumars?

Answer 1

Let us imagine sales per day before endorsements was 100 units per day.(As this information is not given in the question)

Cost sheet for the company before endorsements:

Particulars	Amount(in $)
A. Sales per unit	110
B. Variable Cost of manufacturing	40
C. Contribution (A-B)	70
D. No. of units sold = 100 * 365 = 36500 units per year
E. Total Contribution (C * D)	2555000
F. Fixed Cost Incurred ($5000/day)	1825000
G. Total Income (E-F)	730000

Sales per day after endorsements is 120 units per day.

Cost sheet for the company after endorsements:

Particulars	Amount(in $)
H. Sales per unit	110
I. Variable Cost of manufacturing	40
J. Contribution (A-B)	70
K. No. of units sold = 120 * 365 = 43800 units per year
L. Total Contribution (K * J)	3066000
M. Fixed Cost Incurred ($5000/day)	1825000
N. Endorsements Costs	36500
O. Total Income (L-M-N)	1204500

Therefore, there is an increase in profits of $474500 [1204500-730000], so it is recommended that company should hire Ms. Kumars.

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