The sales manager is convinced that a 11% reduction in the selling price, combined with a $70,000 increase in advertising, would increase this year's unit sales by 25%.a. If the sales manager is right, what would be this year's net operating income if his ideas are implemented? b. Do you recommend implementing the sales manager's suggestions?

Question:

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses are $40.00 per unit, fixed expenses total $200,000 per year. Its operating results for last year were as follows:

Sales $2,160,000

Variable expenses $1,080,000

Contribution margin $1,080,000

Fixed expenses $200,000

Net operating income $ 880,000

As the net profit is $783,000 which is lower than $880,000, my advice would be that this strategy must not be implemented because doesn't brings value to the company.

Explanation:

The contribution per unit is:

Contribution per unit = Selling price per unit - variable cost per unit

Contribution per unit = $80*89% - $40 = $31.2 per unit

The increase in advertisement expense can be calculated under the new condition by the following formula:

New Sales ($) = (Fixed cost + Profit) * Sales Prices per unit  / Contribution Per unit

Here we have total fixed cost of $270,000 by including the $70000 increase in advertising cost.

By putting values we have:

$2,160,000 * 125% = ($270,000 + Profit)* $80 per unit / $38.3 per unit

$2,700,000 *31.2 / 80  = $270,000 + Profit

$1,053,000 - $270,000 = Profit

Profit = $783,000

a manufacturer of printed circuit boards uses exponential smoothing with trend to forecast monthly demand of its product. at the end of december, the company wishes to forecast sales for january. the estimate of trend through november has been 200 additional boards sold per month. average sales have been around 1000 units per month. the demand for december was 1100 units. the company uses α = 0.20 and β = 0.10. make a forecast including trend for the month of january.

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