Question 4 (10 marks)

The following monthly data are available for the Endeavour Company and its only product, Product SW:

	Total	Per Unit
Sales (400 units)	$110,000	$275
Variable expenses	44,000	110
Contribution margin	66,000	$165
Fixed expenses	52,800
Net income	$ 13,200

Required: Treat all parts independently.

1. Without resorting to calculations, what is the total contribution margin at the breakeven point? Explain. (1 mark)

2. Management is contemplating the use of plastic gearing rather than metal gearing in Product SW. This change would reduce variable costs per unit by $15. The company's marketing 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? (4 marks)

3. Assume that Endeavour Company is currently selling 400 units of Product SW per month. Management wants to increase sales and feels that this can be done by cutting the selling price by $25 per unit and increasing the advertising budget by $20,000 per month. Management believes that these actions will increase unit sales by 50%. Should these changes be made? (5 marks)