CASE STUDY (2)(Mark 30%):

The following monthly data in contribution format are available for the DALMA Co. and its only product: Total
Sales......................................................................	$83,700
Variable expenses..............................................	32,700
Contribution margin..........................................	51,000
Fixed expenses....................................................	40,000
Net operating income........................................	$11,000

The Company is currently using 75% of its available capacity selling 600 units of product per month.

Required:(each point is separate)

1. a. Management is contemplating the use of plastic gearing rather than metal gearing in its product. This change would reduce variable expenses by $7.5 per unit. The company's sales manager predicts that this would reduce the overall quality of the product and thus would result in a decline in sales to a level of 350 units per month. Should this change be made? Why?
2. b. What is the sales volume required to achieve a target profits margin 20%?
3. c. Management wants to increase sales and feels this can be done by cutting the unit selling price by $19.5 and increasing the advertising budget by $30,000 per month. Management believes that these actions will increase unit sales by 35%. Should these changes be made?
4. d. An order has been received from an overseas customer for 500 units to be delivered this month at a special discounted price of $76. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. If the offer is accepted, 25% of variables expenses will not be avoided. By how much would this special-order increase (decrease) the company's net operating income for the month?
5. e. DALMA Co. is expecting to experience severe financial difficulties and has applied for a large guaranteed loan. As a condition for obtaining the guarantee, the Bank mandates that the company significantly reduce its break-even point. Highlight and discuss with examples all possible strategies and implications a company might consider to meet required conditions (500 words max).