Key Concepts Break Even = Incremental Expenses on Income Statement/Contribution Margin % Expenses are items that show up on the Income Statement or Profit/Loss Inventory by itself is not an expense. Inventory is an asset and shows up on the balance sheet. Inventory Expense for Full Lot Inventory Profile = Inventory * Inventory Carrying Cost % * Days/365 Fixed Overhead is not an incremental expense on the Income Statement. It is Fixed. You do not factor Fixed Overhead into this analysis unless you need to increase your Overhead to increase the service level. Business Situation You are the Manager of a business. It could be a retailer, distributor or manufacturer. You are contemplating increasing customer service from 95% to 98% for your business to better service your customers needs. This means, you will have the product available 98-percent of the time when a customer wants to purchase it. The following are estimated to happen in your business: Assumptions: Sales are currently $80,000,000 Labor would increase $34,000 Direct materials (one-time increase) $40,000 Transportation would increase $60,000 Rent would increase $18,000 to accommodate the additional space to store the inventory would increase by $3,000,000 Fixed overhead is $100,000 and does not need to be increased above its current level. Inventory carrying cost = 25% Contribution Margin on the product = 30% You will make the inventory permanent, meaning it will be stored for 365-days

If sales are projected to increase by 2%, would you spend the money to increase service levels? Why or why not? You must justify your answer with quantified analysis. 6. If sales are projected to increase 8%, would you spend the money to increase service levels? Why or why not? You must justify your answer with quantified analysis.