Minden Company introduced a new product last year for which it is trying to find an optimal selling price. The company’s present selling price is $60 per unit, and variable expenses are $45 per unit. Fixed expenses are $380,000 per year. The present annual sales volume (at the $60 selling price) is 30,000 units.
Marketing is suggesting increasing the annual advertising expense by $100,000 and decreasing the selling price per unit by $5. Their study suggests these changes will increase sales volume by 20,000 units.
1. What would be the new operating income if marketing implements these changes?
2. Will the company’s financial performance improve with these changes? Yes or No.
Enter your answers in the same order they appear above.
Current position
Selling price per unit = $60
Variable cost per unit = $45
Fixed expense = $380,000
Sales volume = 30,000 units
| Contribution Format Income Statement | |
| Sales (30,000 x 60) | 1,800,000 |
| Variable costs (30,000 x 45) | -1,350,000 |
| Contribution margin | 450,000 |
| Fixed expenses | -380,000 |
| Operating income | $70,000 |
1.
Proposed changes
Decrease in selling price per unit = $5
New selling price per unit = 60-5
= $55
Increase in sales volume = 20,000 units
New sales volume = 30,000+20,000
= 50,000 units
increase in advertising costs = $100,000
New fixed costs = 380,000+100,000
= $480,000
| Contribution Format Income Statement | |
| Sales (50,000 x 55) | 2,750,000 |
| Variable costs (50,000 x 45) | -2,250,000 |
| Contribution margin | 500,000 |
| Fixed expenses | -480,000 |
| Operating income | $20,000 |
New operating income = $20,000
2.
Company's financial performance will not improve.
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