Reliant Chairs sells designer seating to consumers through retail outlets. Total industry sales for the market last year were $128 million, with Reliant’s sales representing 6.5% of that total. Contribution margin is 18%. Reliant’s sales force calls on retail outlets and each sales rep earns $45,500 per year, plus 2.5% commission on all sales. Retailers receive a 38% margin on selling price and generate average revenue of $12,000 per outlet for Reliant.The marketing manager has suggested increasing customer advertising by $200,000. By how much would dollar sales need to increase to break even on this expenditure? What increase in overall market share does this represent?Another suggestion is to hire 3 more sales representatives to gain new consumer retail accounts. How many new retail outlets would be necessary to break even on the increased cost of adding the 3 sales reps?A final suggestion is to make a 10% price reduction across the board. By how much would dollar sales need to increase to maintain Reliant’s current contribution margin? (HINT: See endnote 6 on p.621 of the textbook – set price = $1)Which suggestion do you think Reliant should implement? Explain your recommendation.

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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Reliant Chairs sells designer seating to consumers through retail outlets. Total industry sales for the market last year were $128 million, with Reliant’s sales representing 6.5% of that total. Contribution margin is 18%. Reliant’s sales force calls on retail outlets and each sales rep earns $45,500 per year, plus 2.5% commission on all sales. Retailers receive a 38% margin on selling price and generate average revenue of $12,000 per outlet for Reliant.

1. The marketing manager has suggested increasing customer advertising by $200,000. By how much would dollar sales need to increase to break even on this expenditure? What increase in overall market share does this represent?
2. Another suggestion is to hire 3 more sales representatives to gain new consumer retail accounts. How many new retail outlets would be necessary to break even on the increased cost of adding the 3 sales reps?
3. A final suggestion is to make a 10% price reduction across the board. By how much would dollar sales need to increase to maintain Reliant’s current contribution margin?
  (HINT: See endnote 6 on p.621 of the textbook – set price = $1)
4. Which suggestion do you think Reliant should implement? Explain your recommendation.

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