CleanCo is a successful dry cleaning business in Bangor, Maine. Summary financial data for a typical month

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CleanCo is a successful dry cleaning business in Bangor, Maine. Summary financial data for a typical month of operations are as follows:

Revenue...........................................$30,000

Variable costs (40% of revenue)................12,000

Contribution margin.............................$18,000

Fixed cost..........................................10,000

Profit...............................................$8,000

Because it is the end of winter, managment of CleanCo is considering running a special promotion on parkas, comforters, and other winter items. During the month-long promotion management plans to reduce the charge for cleaning each of these bulky winter items from $9 to $6. Management plans to spend $1,000 advertising the promotion in various print media and believes that the promotion will increase the coming month's sales by 1,500 winter items. CleanCo's average monthly revenue on winter items during a typical month amounts to $4,500. Assume that Cleanco has enough capacity to handle the increased sales volume.

Required:

By how much will CleanCo's profit increase or decrease in the coming month if it runs the promotion?

Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...
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Managerial Accounting

ISBN: 978-1118385388

2nd edition

Authors: Ramji Balakrishnan, Konduru Sivaramakrishnan, Geoff B. Sprinkle

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