Question

Home Seating Company is currently selling 3 comma 200 oversized bean bag chairs a month at a price of ​$75 per chair. The variable cost of each chair sold includes ​$55 to purchase the bean bag chairs from suppliers and a ​$3 sales commission. Fixed costs are $ 12 comma 000 per month. The company is considering making several operational changes and wants to know how the change will impact its operating income.

Requirement 1. Prepare the​ company's current contribution margin income statement.

Home Seating Company
Contribution Margin Income Statement
	Sales revenue
	Variable expenses:
	Cost of goods sold
	Operating expenses
	Contribution margin
	Fixed expenses
	Operating income (loss)

Requirement 2. Calculate the change in operating income that would result from implementing each of the following independent strategy alternatives. Compare each alternative to the current operating income as you calculated in Requirement 1. Consider each alternative separately.

a. Alternative​ 1: The company believes volume will increase by

1616​%

if salespeople are paid a commission of

1212​%

of the sales price rather than the current

​$33

per unit. ​(Use parentheses or a minus sign for an operating​ loss.)

Home Seating Company
Contribution Margin Income Statement
	Sales revenue
	Variable expenses:
	Cost of goods sold
	Operating expenses
	Contribution margin
	Fixed expenses
	Operating income (loss)

Operating income from implementing these changes would

by $

from Requirement 1.

b. Alternative​ 2: The company believes that spending an additional

$ 8 comma 000$8,000

on advertising would increase sales volume by

88​%.

​(Use parentheses or a minus sign for an operating​ loss.)

Home Seating Company
Contribution Margin Income Statement
	Sales revenue
	Variable expenses:
	Cost of goods sold
	Operating expenses
	Contribution margin
	Fixed expenses
	Operating income (loss)

Operating income from implementing these changes would

by $

from Requirement 1.

c. Alternative​ 3: The company is considering raising the selling price to

​$8080​,

but believes volume would drop by

2424​%

as a result. ​(Use parentheses or a minus sign for an operating​ loss.)

Home Seating Company
Contribution Margin Income Statement
	Sales revenue
	Variable expenses:
	Cost of goods sold
	Operating expenses
	Contribution margin
	Fixed expenses
	Operating income (loss)

Operating income from implementing these changes would

by $

from Requirement 1.

d. Alternative​ 4: The company would like to source the product from domestic suppliers who charge

$ 9$9

more for each unit. Management believes that the​ "Made in the​ USA" label would increase sales volume by

1616​%

and would allow the company to increase the sales price by

$ 8$8

per unit. In​ addition, the company would have to spend an additional

$ 7 comma 000$7,000

in marketing costs to get the word out to potential customers of this change. ​(Use parentheses or a minus sign for an operating​ loss.)

Home Seating Company
Contribution Margin Income Statement
	Sales revenue
	Variable expenses:
	Cost of goods sold
	Operating expenses
	Contribution margin
	Fixed expenses
	Operating income (loss)

Operating income from implementing these changes would

by $

from Requirement 1.

Answer 1

Answer to Requirement 1:

Answer to Requirement 2:

Alternative 1:

Sales Volume = 3,200 + 3,200 * 16%
Sales Volume = 3,712

Operating income from implementing these changes would decrease by $13,568 from Requirement 1.

Alternative 2:

Sales Volume = 3,200 + 3,200 * 8%
Sales Volume = 3,456

Operating income from implementing these changes would decrease by $3,648 from Requirement 1.

Alternative 3:

Sales Volume = 3,200 - 3,200 * 24%
Sales Volume = 2,432

Operating income from implementing these changes would decrease by $896 from Requirement 1.

Alternative 4:

Sales Volume = 3,200 + 3,200 * 16%
Sales Volume = 3,712

Operating income from implementing these changes would decrease by $2,008 from Requirement 1.