Question

Squeaky-Clean Products is concerned about the profitability of its product line – a shower massager. A...

Squeaky-Clean Products is concerned about the profitability of its product line – a shower massager. A new competitor has entered the market and Squeaky-Clean is worried about losing market share. Sales projections for 2019 are 60,000 units at a selling price of $ 25 per unit. At this level of sales, variable costs are $ 900,000 and fixed costs are $ 6 per unit.

Ima Sails, Vice President of Marketing, has prepared the following marketing plans:

            Plan 1: increase selling price to $ 29; expected sales decline to 48,000 units

            Plan 2: increase the selling to $ 27; reduce variable costs by $ 1; demand drops to 52,000 units; advertising, a fixed cost, increases $ 25,000

            Plan 3: reduce the selling price to $ 21; reduce variable costs by $ 2; sales of 85,000 units are expected; reduce fixed costs by $ 15,000

Mr. I.B.A. Titewad, the CEO, has asked you to analyze each plan. Based on your analysis, what is your recommendation?

(Hint: find the impact on operating income (i.e., profit) for each plan; compare each with the current situation; report these numbers and decide which is best.

Business   Accounting   
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Homework Answers

Answer #1

Fixed Cost @ 60,000 units is 6 $ per unit.

Hence, total fixed cost = 360,000 $

Fixed cost will stay same in all scenarios.

Variable Cost per unit = 900,000 / 60,000 = 15 $ per unit

Let's prepare a comparative income statement for each of these scenarios

Sales Budget Scenarios

Particulars Scenario 1 Scenario 2 Scenario 3 Scenario 4
Selling Price per unit 25 27 21 29
Sales Units Estimated 60000 52000 85000 48000
Total Sales 1500000 1404000 1785000 1392000
Variable Cost 900000 728000 1105000 720000
Fixed Cost 360000 360000 345000 345000
Net Margin 240000 316000 335000 327000

Based on the above calculation, it's clear that profitability will be highest when sales price is 21 $ per unit.

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