Question

The sales manager of Trisha’s Global Marketing (TGM) is considering expanding sales by taking their Original Widget and modifying it for export into the European and Asian markets. Relatively minor cosmetic changes will be made to enhance appeal to local tastes. After reviewing the sales forecasts, the sales department feels that 50% of units sold will be the Original product, 30% will be new Euro and the remainder will be the new Pacific.

The information in the table has been assembled by the sales and production departments. The common fixed costs associated with the manufacture of these three products are $1,920,000 per year and TGM has a marginal tax rate of 25%.

	Original	Euro	Pacific
Sales Price (per unit)	$65.00	$75.00	$70.00
Material cost (per unit)	$26.00	$28.00	$23.00
Direct labor (per unit)	$13.00	$14.00	$15.00
Variable OH (per unit)	$17.00	$16.00	$16.00

If the target sales mix is achieved and 180,000 total units are sold, calculate the estimated total profit before taxes assuming a $2.00 per unit increase in the sales price of the Original can be obtained by investing in a $100,000 sales campaign. No other assumptions are changed.

If the target sales mix is achieved and 180,000 total units are sold, what is the estimated profit?

Answer 1

1)	Sales Mix of Original, Euro and Pacific Products
	Particulars	Original	Euro	Pacific	Total
	Units Sold	90000	54000	36000	180000
	Sales Mix Ratio	50%	30%	20%	100%
		[1,80,000 x 50%]	[1,80,000 x 30%]	[1,80,000 x 20%]
2)	Calculate the Estimated Total Profit Before Taxes
	Particulars	Original	Euro	Pacific	Total
	Units Sold	90000	54000	36000	180000
	Sale Price (p.u.)	$65	$75	$70
	Sales Value                          [A]	$5,850,000	$4,050,000	$2,520,000	$12,420,000
Less:	Material Cost (p.u.)	$26	$28	$23
Less:	Direct Labour (p.u.)	$13	$14	$15
Less:	Variable OH   (p.u.)	$17	$16	$16
Less:	Total Variable Cost           [B]	$5,040,000	$3,132,000	$1,944,000	($10,116,000)
	Contribution (p.u.)	$9	$17	$16
	Total Contribution     [A - B]	$810,000	$918,000	$576,000	$2,304,000
Less:	Total Common Fixed Cost				($1,920,000)
	Total Profit Before Tax				$384,000
Less:	Marginal Tax @ 25%				($96,000)
	Total Profit After Tax				$288,000
3)	Calculate Estimated Total Profit Before Taxes, If Investing $1,00,000 Sales Campaign
	Particulars	Original	Euro	Pacific	Total
	Units Sold	90000	54000	36000	180000
	Sale Price (p.u.)	$67	$75	$70
	Sales Value                          [A]	$6,030,000	$4,050,000	$2,520,000	$12,600,000
Less:	Material Cost (p.u.)	$26	$28	$23
Less:	Direct Labour (p.u.)	$13	$14	$15
Less:	Variable OH   (p.u.)	$17	$16	$16
Less:	Total Variable Cost           [B]	$5,040,000	$3,132,000	$1,944,000	($10,116,000)
	Contribution (p.u.)	$11	$17	$16
	Total Contribution     [A - B]	$990,000	$918,000	$576,000	$2,484,000
Less:	Total Common Fixed Cost				($2,020,000)
	Total Profit Before Tax				$464,000
Less:	Marginal Tax @ 25%				($116,000)
	Total Profit After Tax				$348,000