Question

Prem Narayan, a graduate student in engineering, to market a radical new speaker he had designed for automobile sound systems, founded Acoustic Concepts, Inc. Prem established the company’s headquarters into rented quarters in a nearby industrial park. He hired a receptionist, an accountant, a sales manager, and a small sales staff to sell the speakers to retail stores. Prem asked his accountant, Bob Luchinni, to prepare several cost-volume-profit analyses, using the information shown below.

Sales price for one speaker set................................................... $250 Variable manufacturing cost for each speaker set (direct
materials) ................................................................................... $150 Fixed expenses per month (rent, salaries of receptionist, sales

people, accountant, and Prem)................................................... $35,000 Number of speaker sets sold per month..................................... 400

Prem and other management personnel are considering the use of higher-quality components, which would increase variable costs by $10 per speaker. However, the sales manager predicts that the higher overall quality would increase sales to 480 speaker sets per month. Should the higher quality components be used?

The sales manager believes that by reducing the selling price of speakers by $20, and also by increasing the advertising budget by $15,000 per month, that sales will increase to 600 speaker sets per month. Should the changes be made?

The sales manager would like to place the sales staff on a commission basis of $15 per speaker sold, rather than on flat salaries that now total $6,000 per month. The sales manager is confident that the change will increase monthly sales to 460 speaker sets per month. Should the change be made?

Suppose Acoustic Concepts has an opportunity to make a bulk sale of 150 speakers to a wholesaler, if an acceptable price can be worked out. The sale would not disturb the company’s regular sales, nor would if affect fixed operating costs per month. What price should be quoted to the wholesaler if Acoustic Concepts wants to increase its monthly profits by $3,000?

 C.M.=contribution margin, S.P.=sales price, V.C.=variable cost, F.C.=fixed cost

 C.M. per unit = S.P. per unit – V.C. per unit

 The break even point is the point at which the total contribution margin equals fixed costs.

 Break even units sold = F.C. / C.M. Per unit

 Break even sales dollars = F.C. / C.M. Percentage

 C.M. Percentage = C.M. per unit / S.P. per unit, or C.M. (total) / Sales (total)

Answer 1

Original income = contribution*sales units - Fixed cost
(250 - 150)*400 - $35000 = $5000
1) Income on increase in variable costs =
(250 - 150-10)*480 - $35000 = $8200
We should use higher quality components as it increases the Income.
2) Income on selling price and incurring advertising=
[(250-20) - 150]*600 - (35000+15000) = -2000
No, we should not implement the changes of SP decrease
and incurring advertising fixed cost, as it results into loss.
3)Income on commission paid to sales staff=
(250 - 150-15)*460 - ($35000-6000) = $10100
Yes, changes could be made towards paying commission to
sales staff then salary, as it increases the income.
4) Price to be quated for the special order of 150 speakers:
Contribution per unit + (increase in monthly profits / special units)
(250 -150) + (3000 / 150) = $120 per speaker