Drake, Inc. manufactures electric welders that it sells to other manufacturers, and sales last year were...

Drake, Inc. manufactures electric welders that it sells to other manufacturers, and sales last year were $45 million. Drake has a 35% contribution margin. The marketing manager has suggested increasing the number of sales representatives by five, which would cause fixed costs to increase by $250,000. Another suggestion is to reduce price by 10%. What incremental dollar volume would be necessary to break even on the suggestion to hire five additional sales reps? What absolute increase in dollar sales volume would be necessary to maintain Drake’s current contribution if price was reduced by 10%? Which suggestion do you think Drake should implement? Explain your recommendation

Expert Solution

1-
sales		45
v.cost	45*(1-.35)	29.25
contribution margin		15.75
contribution margin ratio = contribution/sales	15.75/45	0.35
incremental sales to recover the fixed cost of 5 new sales representatives	.25/35%	0.71
new level of sales to recover fixed cost	45+.71	45.71

2-
sales	45*(1-.1)	40.5
variable cost	as of before	29.25
new contribution margin		11.25
new contribution margin ratio = contribution/sales		27.78%
total contribution margin required as before		15.75
new level of sales = contributin margin/new contribution margin ratio	15.75/27.78%	56.70
absolute increase in sales	56.70-45	11.7
3-
Dark should implement employment of additional sales representatives because this fixed cost can be recovered by additional sales of .71 million while if prices are reduced by 10% then additional sales of 11.7 million would be made additional to maintain the present level of contribution margin

jeff jeffy answered 10 months ago

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