The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1.70 per unit. He thinks that this move, combined with some increase in advertising, would increase this year's sales by 25%. How much could the president increase this year's advertising expense and still earn the same $360,000 net operating income as last year?

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

$732,625

Explanation:

The contribution per unit is:

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

Contribution per unit = $80 - $40 - $1.7 = $38.3 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

By putting values we have:

$2,160,000 * 125% = (Fixed cost + $360,000)* $80 per unit / $38.3 per unit

$2,700,000 * $38.3 per unit / $80 per unit  = Fixed Cost + $360,000

$1,292,625 - $360,000 = Fixed Cost

Fixed Cost = $932,625

This means that the maximum amount of increase in the advertisement expense would be $732,625 to earn a profit of $360,000

The president must increase the advertising expense by $687, 700.

Explanation:

The president must increase the advertising expense by $687, 700.

If we were to compute the income statement for the year,  

Sales would increase by 25%: $2, 280, 000 x 125% = $3, 600, 000

Variable expenses would increase by the increase in sales commission pf $1.70 per unit:  

$1.70 x 19, 000 units = $32, 300

Total variable expense = $1, 440, 000 + $32, 300 = $1, 472, 300

[We arrived at 19, 000 by dividing the sales value of $2880, 000 by the selling price of $120

$2, 880, 000 / $120 = 19, 000 units.]

In order to determine by how much the advertising expense should increase by, we need to compute the income statement.

Sales             $3, 600, 000

Less: Variable expenses-$1, 472, 300

Contribution margin  $2, 127, 700

Fixed cost (given)  $160, 000

Advertising increase  x

Net operating income  $1, 280, 000

To determine the value of the advertising expense, we need to work backwards. Subtract the net operating income value and the fixed cost value from the contribution margin.

Therefore,  

$2, 127, 700 - $1, 280, 000 - $160, 000 = $687, 700

in 2001, dell computer became the world’s largest personal computer vendor, continuing to

gain market share and post profits in an industry struggling with slumping sales and billions of

dollars in losses. dell sells 90% of its pcs directly to the final customer, largely bypassing the

reseller channel that accounts for most of the world’s pc sales. this direct customer relationship

is the key to dell’s business model, and provides distinct advantages over the indirect sales

model. dell’s direct relationship with the customer allows it to tailor its offerings to customer

needs, offer add-on products and services, and use the internet to offer a variety of customer

services. in addition, dell’s pcs are built to customers’ specifications upon receipt of an order,

giving dell additional advantages over indirect pc vendors who must try to forecast demand and

ship products based on those forecasts. dell’s direct sales and build-to-order model has achieved

superior performance in the pc industry in terms of inventory turnover, reduced overhead, cash

conversion, and return on investment (kraemer, et al., 2000).

explanation:

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