Naomi Soderstrom sells over-boots for use in wintry conditions. Naomis products, worn over shoes, provide traction on ice and packed
Naomi Soderstrom sells over-boots for use in wintry conditions. Naomiâ€™s products, worn over shoes, provide traction on ice and packed snow, helping prevent falls. Naomiâ€™s income for her most recent year of operations is as follows:
Naomi believes that while the cost of direct materials and direct labor varies with the number of units, the cost of variable selling and administration expenses are proportional to revenues.
Not satisfied with her current profit and 8 percent return on sales ($192,000/$2,400,000), Naomi wants to improve profits in the coming year. She is considering changing her selling price. If Naomi increases her selling price to $22 per unit, then she expects sales to stay at 120,000 units in the coming year. However, if she reduces her selling price to $19 per unit, then she expects sales to increase to 175,000 units.
Regardless of her pricing strategy, Naomi expects next yearâ€™s costs to be as follows:
â€¢ Direct material costs to increase by 10 percent.
â€¢ Direct labor costs to increase by 5 percent.
â€¢ Variable selling and administration costs to stay the same as a fraction of each sales dollar.
â€¢ Total fixed costs to stay the same at $888,000.
Prepare a budgeted income statement for each of Naomiâ€™s two pricing choices. What price should Naomichoose?
This problem has been solved!
Step by Step Answer: