Module Two Problem Set

Question 7 of 17

2.44 / 3

Steven, the owner of a local poster shop, comes to you for help. Weve only been breaking even the past two years, and Im getting very frustrated! I dont know what to do because I feel like Ive already tried to improve our processes as much as possible, but we still havent been able to generate a profit. Do you have any suggestions as to how we can turn things around? I just dont think we can even consider moving forward with this business unless we can earn $13,000 in operating income next year. Even then, well have to think long and hard about what the future holds. Steven shares the following information with you, as you ponder different scenarios to help your friend.

Selling price		$7.60
Cost for paper, per unit		0.80
Cost for printing, per unit		0.95
Cost for film, per unit		0.55
Staff salaries		44,000
Other operating costs		24,900

After thinking about it for a while, you suggest the following possibilities to help him turn things around.

1.		Lower the selling price by 10% to increase sales volume by 5%.
2.		Advertise on the radio and with social media, for a combined cost of $1,000, to increase volume by 10%.
3.		Use a more affordable paper on which to print the posters (available for $0.60 per unit), in combination with a less-expensive film to cover the top of the poster (available for $0.40 per unit).
4.		Instead of paying the salespeople a fixed salary, move to a commission-based compensation plan (save $21,000 in salary; incur $1.45 per unit sold commission), which should increase sales volume by 20%.

(c1)

After these initial discussions, Steven realizes that he has ignored any possible tax effects thus far. He estimates that his business will be subject to a 20% tax rate. Will any of the proposed scenarios allow him to reach an after-tax income goal of $13,000? If so, which one(s)? (Round answers to 2 decimal places, e.g. 5,125.25.)

		After-Tax Operating Income		Reach After-Tax Income Goal?
Option 1		$		YesNo
Option 2		$		YesNo
Option 3		$		YesNo
Option 4		$		YesNo

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