Beans Unlimited sells specialty coffees in 1-kilogram packages. Fixed costs are budgeted at $730,000 per year. For the upcoming year, revenues are forecasted to be $3,240,000 (selling price is $36 per kilogram) and the company has an average contribution margin percentage of 48%.
1. What is the budgeted operating income given the sales forecast?
2. Beans is considering reducing its fixed costs by 15%. This would result in a lowering of the contribution margin percentage to 42%. What would be the new forecasted operating income?
3. Another alternative Beans is considering is raising its selling price by 10%. It estimates this would result in a reduction in sales volume of 5%. There would be no changes to variable or fixed costs. What would be the forecasted operating income with the new selling price and volume? What is the new contribution margin percentage?
4. Which strategy would you recommend for the company? Explain.