Question

Currently, the NBA Company sells 600 units of its product, NETS, per year with a $500 selling price. Variable Expenses for the financial period were $180,000. Fixed Expenses for the financial period totaled $100,000. The management of the company believes that they can double the selling price and sell 50% more units if they spend $50,000 more in advertising.

                                                                                    

1. Construct a Contribution Margin Statement for both the current and proposed scenario. Determine if management’s initiative should be implemented. Be specific as to your basis for your recommendation.  

2. Determine the break-even point in units under the proposed management initiative.

3. Determine the break-even point in sales dollars under the proposed management

initiative.

4. Calculate the Degree of Operating Leverage for the new management initiative.

Answer 1

NBA Company -Analysis
Ans a)			Current	Proposed
Sales Units		600	900
Selling price	Per unit	500	1000
Variable exps	Note 1	180000	320000
Fixed Expenes		100000	150000
Sale value		300000	900000
Variable Cost		180000	320000
Fixed Cost		100000	150000
Contribution		Sales - Variable Cost
		120000	580000
PV Ratio		Contribution / Sales * 100
			40.00%	64.44%
Ans b )	Break Even Point
(Units)		Fixed Cost / SP- VC
		500	220.59
			221
Ans c )	BEP - Value		Fixed Cost / PV ratio
		250000	232758.62
Ans d )	Degree of operating leverage or Margin of Safety		Excess of actual sales over BEP value
		50000	667241.38
	Note 1	Variable cost per unit =
		Variable cost value / Sales units
		300		300
	Note 2	Advertisement cost of $ 50000 has been
		added to the Variable Cost as this is in
		direct relation with Sales