Question

The Jonco Company is considering adding a new product to their line of kitchen gadgets. Jon has budgeted $70,000 for a marketing campaign. Jon anticipates a distribution cost of $5.00 on each unit. Jonco can obtain quantity discounts on the cost of the Dice-O-Matic as follows: Qty < 1500 1500-1999 2000-2499 2500-2999 3000-3499 > 3499 Cost $82.50 $81.00 $78.00 $75.75 $72.50 $70.00 If he adds the product to his line, Jon projects an increase in his payroll expense of $42,000 and an increase in overhead of $18,000. Jonco’s previous experience with similar products and promotion programs is shown in the following price/ demand table. Price 109.95 119.95 129.95 139.95 149.95 159.95 169.95 Demand 3250 3100 3000 2800 2650 2500 2000 a) Jon has asked you to prepare a pro-forma contribution income statement showing his marginal operating income (EBIT) if he adds the dice-o-matic. Use the pro-forma statement in the Pro-forma file and show all work for the following questions on the Part 1 spreadsheet. b) How do sales revenue and total costs vary as the selling price ranges from $110 to $160, in increments of $5? Show the results in a single table and a single chart. c) How does operating income change as a result of simultaneous changes in Price ($110-$160) and Distribution Cost ($3-$10)? d) What is the least Jonco could charge for the Dice-O-Matic and still break even? e) What selling price is required to generate a 45% contribution margin ratio?

Answer 1

a) Proforma statement of income is shown below at different demand levels of the product -

Demand level	3250	3100	3000	2800	2650	2500	2000
Sales	357338	371845	389850	391860	397368	399875	339800
Less - Variable cost
Cost of Goods sold	235625	224750	217500	212100	200738	189375	156000
Distribution cost	16250	15500	15000	14000	13250	12500	10000
Total variable cost	251875	240250	232500	226100	213988	201875	166000
Contribution margin	105463	131595	157350	165760	183380	198000	173800
Contribution margin %	29.51%	35.39%	40.36%	42.30%	46.15%	49.52%	51.15%
Less - Fixed Cost
Advertising	70000	70000	70000	70000	70000	70000	70000
payroll	42000	42000	42000	42000	42000	42000	42000
Overhead	18000	18000	18000	18000	18000	18000	18000
Total Fixed Cost	130000	130000	130000	130000	130000	130000	130000
Net operating income before taxes	-24538	1595	27350	35760	53380	68000	43800
Operating Margin %	-6.87%	0.43%	7.02%	9.13%	13.43%	17.01%	12.89%