Question

Brown Corporation produces and sells a single product. Data concerning that product appear below: Selling price Per Unit $240 Variable expenses 72 Contribution margin $168 • Fixed expenses are $438,000. • The company expects to sell 6,000 units in the upcoming period. Brown’s marketing manager would like to reduce the selling price by $20 and increase the advertising budget by $56,000. The marketing manager predicts that these two changes would increase sales by 1,500 units.

Required:

1. In the spaces provided below, prepare contribution format income statements for the upcoming period for Brown where a) Brown rejects the marketing manager’s proposal and b) Brown approves the marketing manager’s proposal. Scenario A – Base Case - Brown rejects Proposal Scenario B – Brown approves Proposal

2. Based on this analysis, Brown should ____________ (approve or reject) the marketing manager’s proposal because it ________________(increases or decreases) Net Operating Income by $___________.

Answer 1

PART 1- Income Statement

Particular	Proposal A	Proposal B
Sales	$1,440,000 [6,000*240]	$1,650,000 [7,500*220]
Less: Variable Cost	$432,000 [6,000*72]	$596,000 {[7,500*72] + 56,000}
Contribution	$1,008,000	$1,054,000
Less: Fixed Cost	$438,000	$438,000
EBIT	$570,000	$616,000

****Assumed that Advertisement cost is also Variable cost

PART 2-Based on this analysis, Brown should Approve the marketing manager’s proposal because it Increases Net Operating Income by $ 46,000