The Organic Corn Company processes and distributes corn packed in 500-gram plastic bags that are sold to supermarkets for 50 cents each in boxes of 100 bags. The most recent statement of profit or loss and key financial metrics of the Organic Corn Company are provided below.

Management at Organic Corn has been increasingly concerned about the plastic bags being used. It has explored a range of options and is thinking of switching to an alternative packaging option. This will require some significant changes but with only a minimal impact on revenue, at least in the short term. The following estimates have been made with respect to the next 12 months. 

• Price increase of 5 cents per 500-gram packet, with volume expected to remain the same in the short term.
• Sales commission expenses are expected to remain the same proportion of sales dollars.
• Administration expenses are expected to increase by 15 per cent.
• Investment in packaging technology will be $125 000: $25 000 in cash, the rest in debt.
• Gross margin expected to be 31 per cent.

Required

(a) Calculate the impact of the new packaging system on annual profit.

(b) Comment on your analysis.

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Statement of profit or loss Sales Cost of sales $800 000 $540 000 Gross margin 260 000 Administrative salaries 80 000 Sales commissions 69 000 Advertising Bad debts expense 75 000 16 000