Answered: % of sales Net sales €100,000,000 100…

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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Hair Zone manufactures a brand of hair-styling gel. It is considering adding a modified version of the product – a foam that provides stronger hold. Hair Zone’s variable costs and prices to wholesalers are: Hair Zone expects to sell 1 million units of the new styling foam in the first year after introduction, but it expects that 60 per cent of those sales will come from buyers whonormally purchase Hair Zone’s styling gel. Hair Zone estimates that it would sell 1.5 million units of the gel if it did not introduce the foam. If the fixed cost of launching the new foam will be €100,000 during the first year, should Hair Zone add the new product to its line? Why or why not?

% of sales
Net sales
€100,000,000
100
Cost of goods sold
55,000,000
55
Gross margin
€45,000,000
45
Marketing expenses
Sales expenses
€15,000,000
Promotion expenses
14,000,000
Freight
10,000,000
39,000,000
39
General and administrative expenses
Managerial salaries and expenses
€2,000,000
Indirect overhead
5,000,000
7,000,000
7
Net profit before income tax
-€1,000,000

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