Question

Applehead Technology is a company that purchases a device called the EyePod from a supplier and then sells the devices to retail customers. If the company makes no changes in its operations, the company expects the following for the coming year.

# of units sold                                                              30,000

Price                                                                           $300 per unit

Cost of merchandise                                                 $100 per unit                       

Rent and Salaries for the year                                 $1,300,000

The company is holding a meeting to discuss ways to increase its profit – that is the company’s goal. At that meeting, Maria Garcia, the marketing manager, says “If we make the changes I suggest, I think we can attract more customers and increase our share of the market. Currently, our customers pay for shipping. Market research says customers hate shipping charges, so rather than having customers pay it, we should pay it. Shipping would cost us $3 per unit. Market research also shows that our prices are not competitive. So, we should lower our price to $270. If we take these actions, I estimate we will increase the number of units sold to 32,000.”

1. On the spreadsheet provided labeled “For Problem 3a”, prepare the contribution margin income statements to analyze each of the 2 possibilities for the coming year, namely
   1. Applehead makes no changes
   2.    Applehead adopts Garcia’s proposal

Answer the following questions on the separate answer sheet labeled “For Problem 3b, c, d, e”:

2. Mr. Big, the CEO of the company says to Maria “Clearly your suggestion is a good one. Based on your estimates, we will see an additional 2,000 units. Let’ do it!” How would you answer Mr. Big?
3. Assume Maria’s suggestions are NOT implemented. What is the breakeven point for Applehead? (Can be in $ or in units – your choice.) Show all work.
4. Calculate Applehead’s margin of safety. You can measure it in units or dollars or as a % of sales (your choice, but you only need to compute one of those). In making your margin of safety computation, assume Maria’s suggestions are NOT implemented and that the company sells the 30,000 units. Show all work.
5. Explain briefly what margin of safety tells the company – what is the meaning of the number you computed?

Answer 1

Please find the attached sheets,

Please comment for any explantion,

Thanks,