Chapter 18, Problem 4R

The president of Poleski would like to know the effect that each of the following suggestions for improving performance would have on contribution margin per unit, sales needed to break even, and projected net income for next year. Each change should be considered independently. Reset the Data Section to its original values after each suggestion is analyzed. Fill in the table following the suggestions with the results of your analysis.

1. a. The president suggests cutting the productʼs price. Since the market is relatively sensitive to price, “. . . a 10% cut in price ought to generate a 30% increase in sales (to 156,000 units). How can you lose?”
2. b. The sales manager feels that putting all sales personnel on straight commission would help. This would eliminate $77,000 in fixed sales salaries expense. Variable sales commissions would increase to $2.00 per unit. This move would also increase sales volume by 30%.
3. c. Poleskiʼs head of product engineering wants to redesign the package for the product. This will cut $1.00 per unit from direct materials and $0.50 per unit from direct labor, but will increase fixed factory overhead by $100,000 for additional depreciation on the new packaging machine. The package redesign would not affect sales volume.
4. d. The firmʼs consumer marketing manager suggests undertaking a new advertising campaign on Facebook. This would cost $30,000 more than is currently planned for advertising but would be expected to increase sales volume by 30%.
5. e. The production superintendent suggests raising quality and raising price. This will increase direct materials by $1.00 per unit, direct labor by $0.50 per unit, and fixed factory overhead by $110,000. With improved quality, “. . . raise the price to $18.50 and advertise the heck out of it. If you double your current planned advertising, Iʼll bet you can increase your sales volume by 30%.”