Question

Tochet Company manufactures CB1, a citizens band radio. The company’s plant has an annual capacity of 50,000 units. Tochet currently sells 40,000 units at a price of $105. It has the following cost structure:

Variable manufacturing cost per unit $45

Fixed manufacturing costs $800,000

Variable marketing and distribution cost per unit $10

Fixed marketing and distribution costs $600,000

The Marketing Department indicates that decreasing the selling price to $99 would increase sales to 50,000 units. This strategy will require Tochet to increase its fixed marketing and distributing costs.

Question:

1. What is the current operating income of Tochet?

2.Calculate the maximum increase in fixed marketing and distribution costs that will allow Tochet reduce the selling price to $99 and maintain its operating income (sales volume at capacity).

Answer 1

1
	Current Income Statement:
	Sales Revenue	4,200,000
	Less: Variable Manufacturing Cost	1,800,000
	Less: Variable Marketing & Distribution Cost	400,000
	Contribution Margin	2,000,000
	Less: Fixed Manufacturing Cost	800,000
	Less: Fixed Marketing & Distribution Cost	600,000
	Net Operating Income	600,000
2	Unit Price	99
	Less: Variable Manufacturing Cost	45
	Less: Variable Marketing & Distribution Cost	10
	Contribution Margin	44
	Sales Volume	50,000
	Contribution Margin-Sales Volume	2,200,000	(44*50000)
	Less: Fixed Manufacturing Cost	800,000
	Net Balance	1,400,000
	Net Operating Income to be Maintained	600,000
	Maximum Fixed Marketing & Distribution Cost	800,000
	Existing Fixed Marketing & Distribution Cost	600,000
	Maximum Increase	200,000