Question

The Jonco Company is considering adding a new product to their line of kitchen gadgets. Jon...

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?

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%