Question

Mark from Mark's Mowers wants to make some changes to his business. He has asked each of his department managers (Production, Marketing, and Sales ) to submit a plan for growth to you the General Manager. Currently, Mark is selling 400 lawn mowers a month at $250 each. His variable cost per lawnmower is $140 each. His fixed cost per month is $ 25,000. For purposes of this project assume that each scenario is within the relevant range (no larger space is needed, no additional people will be needed and no additional fixed cost will be necessary.

The Marketing Department is considering three different alternatives.                                                         

1. Do $5,000 in advertising. The Marketing department believes this would increase sales by at least 35 units.                                                                                                                                            

2. Do $ 10,000 in advertising. The Marketing department believes this would increase sales by at least 65 units.                                                                                                                                          

3. Do $ 6,000 in advertising combined with a "sales" price of $225 (a 10% discount). They believe that this would increase sales by at least 50 units.                                                                           

Question 6. How much money will Mark make in each of the separate situations?

Question 7. Which of the scenarios is best and why?                                                                  

The Sales Department is also considering three different alternatives.                                                                                                                                            

1. Offer a commission of $ 5 per mower to the sales force. They believe that this will increase sales by at least 20 units.                                                                                                                                             

2. Offer a commission to the sales force of $15 per mower. They believe that this will increase sales by at least 35 units per month.                                                                                              

3. Offer a commission of $ 25 per mower and increase the cost of the mower by $10. Even with the higher price, they believe it would increase mower sales by at least 40 mowers per month.                                                                                                                                       

Question 8. How much money will Mark make in each of the separate situations?

Question 9. Which of the scenarios is best and why?                                                                                  

Question 10. As the General manager of Mark's Mowers which of the above scenarios do you this is best going forward and why?

Answer 1

Present Profit

Add/Less	Particulars	Amount	Remarks
	Selling price	1,00,000	400 lawn mowers*Rs.250
Less:	Varible cost	56,000	400 lawn mowers*Rs.140
	Contibution	44,000
Less:	Fixed cost	25,000
	Profit	19,000

Answer for Qn 6

Mark will make following amount of money in each of the separate situations

Particulars	Situation 1	Situation 2	Situation 3
Profit before assumsions	19,000	19,000	19,000
Less: Additional Advertising cost	5,000	10,000	6,000
Add: Increase in sales	3,850	7,150	4,250
	=35*(250-140)	=65*(250-140)	=50*(225-140)
Profit earned after assumption	17,850	16,150	17,250

Qn7

Considering the three situation, in situation 1 Mark earns higher profit. Hence it better compared to other situations. But the present profit earned by Mark is much higher than these three situations hence it is suggested not to proceed with any of the situations.

Qn8

Particulars	Situation 1	Situation 2	Situation 3
Profit before assumsions	19,000	19,000	19,000
Less: Commision cost	2,100	6,525	11,000
	(5*(400+20)	(15*(400+35)	(25*(400+40)
Add: Increase in sales	2,200	3,850	4,800
	=20*(250-140)	=35*(250-140)	=40*(250+10-140)
Profit earned after assumption	19,100	16,325	12,800

Qn 9

Considering the three situation, in situation 1 Mark earns higher profit. Hence it better compared to other situations. And also in situation 1 $100 is earned higher than the present profit.

Note:

When additional units are produced its variable cost will increase in line with increase in units whereas Fixed cost will stay constant