Based on the following Contribution Margin Income Statement the consulting group would like to evaluate if...
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Based on the following Contribution Margin Income Statement the consulting group would like to evaluate if adding sales expenses as a fixed cost would be a beneficial strategy. Scenario: Projected Contribution Margin Income Statement Sales volume of packaged food items(units) Revenue Variable expenses Contribution margin Fixed Expenses Net Operating Income 50,000 $ 900,000 $ 600,000 $ 300,000 $ 220,000 $ 80,000 D Methodology: The consulting group would assume that all packaged food items sell at the same price per unit. The above model assumes that sales commission is a variable expense and that salespersons are paid for each unit they sell. In order to incentivize salespersons, the consulting group is proposing that salespersons be hired on salary and not on commission basis. Combine this with additional advertising, the fixed expenses would increase to $ 250,000. This would also lead to an increase in revenue to the extent of 60% and net operating income by 20 %. Variable expenses would not increase at the same rate as revenue. The group will calculate the breakeven sales units and breakeven sales dollars under both the current scenario and under the proposed scenario. The group will also complete the CM format income statement for the proposed scenario, as well as calculate the new CM ratio for the proposed scenario and the percentage increase in sales needed to break-even (percentage increase in break-even from the current scenario to the proposed scenario). They will also advise the business partners on potential risks that may arise in this case and recommend if this approach of adding fixed cost related to selling is recommended. Based on the following Contribution Margin Income Statement the consulting group would like to evaluate if adding sales expenses as a fixed cost would be a beneficial strategy. Scenario: Projected Contribution Margin Income Statement Sales volume of packaged food items(units) Revenue Variable expenses Contribution margin Fixed Expenses Net Operating Income 50,000 $ 900,000 $ 600,000 $ 300,000 $ 220,000 $ 80,000 D Methodology: The consulting group would assume that all packaged food items sell at the same price per unit. The above model assumes that sales commission is a variable expense and that salespersons are paid for each unit they sell. In order to incentivize salespersons, the consulting group is proposing that salespersons be hired on salary and not on commission basis. Combine this with additional advertising, the fixed expenses would increase to $ 250,000. This would also lead to an increase in revenue to the extent of 60% and net operating income by 20 %. Variable expenses would not increase at the same rate as revenue. The group will calculate the breakeven sales units and breakeven sales dollars under both the current scenario and under the proposed scenario. The group will also complete the CM format income statement for the proposed scenario, as well as calculate the new CM ratio for the proposed scenario and the percentage increase in sales needed to break-even (percentage increase in break-even from the current scenario to the proposed scenario). They will also advise the business partners on potential risks that may arise in this case and recommend if this approach of adding fixed cost related to selling is recommended.
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Answer rating: 100% (QA)
Current Scenario Before Proposed Changes Sales Volume 50000 units Revenue 900000 Variable Expenses 600000 Contribution Margin 300000 Fixed Expenses 22... View the full answer
Related Book For
Cornerstones of Cost Management
ISBN: 978-1285751788
3rd edition
Authors: Don R. Hansen, Maryanne M. Mowen
Posted Date:
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