Question

Kevin Co.’s projected contribution-format income statement for the upcoming month is shown below:

Sales (500 units)	$10,000
Variable expenses	4,000
Contribution margin	6,000
Fixed expenses	1,000
Net operating income	$5,000

1. The company’s manager thinks that adding a salaried sales staff member at a cost of $2,000 per month will increase sales by $4,000 per month. If he is correct, what will be the net dollar advantage or disadvantage of making this change?
2. Refer to the original data, the company’s manager believes that a new production process will improve profitability. He plans to add new machinery that will cut variable expenses in half. This will increase fixed expenses by $3,000. He expects after this change the company’s unit sales will increase by 25%. If he is correct, what will be the net dollar advantage or disadvantage of making this change?
3. Refer to the original data, the company expects to decrease variable expenses by 5% and wishes to pass the savings along to customers. The manager wishes to maintain the exact same contribution margin ratio as the original data. What sales price will need to be charged to maintain the same contribution margin ratio?

Answer 1