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?

Homework Answers

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%

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