Question

Sunflower Company manufactures and sells a product called “Sunshine”. Using regression analysis, company has determined the monthly behavior of manufacturing, selling, and administrative costs as follows:

Total Fixed Costs        Variable per Unit

Manufacturing                         $350,000                           $2.50

Selling                         $110,000                           $1.10

Administrative                         $140,000                           $0.40

Current selling price per unit of Sunshine is $10. The production capacity is up to 300,000 units per month and currently company is manufacturing and selling 150,000 units of Sunshine per month.

1. Because of decline in sales in recent month, company wants to increase advertising by $90,000. What should be the minimum expected increase in sales units in order to justify this advertising proposal?

2. Company believes that by reducing selling price by $1.00 can increase sales units by 40,000 units. Should this proposal be accepted? Why?

3. Company wants to hold a two-week sale at a nearby Shopping Mall.   The Mall has offered two options for use of space in a store in the Mall.

Option 1: A fixed payment of $24,000 for the sale period

Option 2: $3,000 plus 10% of total sales earned during the sale period

Develop a model to facilitate the decision making by Company in this regard.

4. Company has determined the following possible sales scenarios with associated probability in the

Shopping Mall. Given this data, which of the two options should company choose? Why?

Sales Units                       Probability

3,000                                         10%

4,000                                         20%

5,000                                         40%

6,000                                         20%

7,000                                         10%

Answer 1

(1) SP per unit = $10

      VC per unit (2.50 + 1.10 + 0.40) = $4

     Contribution per unit = $6

Advertising Increase by = $90000

Need to increase unit sales = 90000/6 = 15000 units

(2)

	Before	After
Sale	(150000 * 10) =1500000	(190000 * 9) =1710000
(-) VC	(150000 * 4) =600000	(190000 * 4) =760000
Contribution	900000	950000

This Proposal need to be accepted

(3 & 4)

Expected Sale = (3000 * 10%) + (4000 * 20%) + (5000 * 40%) + (6000 * 20%) + (7000 * 10%) = 5000 units

Option 1 = Fixed Payment of $24000

Option 2 = 3000 + 10% of sale

                  3000 + 10% * (5000 *10) = 8000

Option 2 is need to be selected