Monterey Co. makes and sells a single product. The current selling price is $15 per unit. Variable expenses are $9 per unit, and fixed expenses total $27,000 per month.
Required:
(Unless otherwise stated, consider each requirement separately.)
a. Calculate the break-even point expressed in terms of total sales dollars and sales volume.
b. Calculate the margin of safety and the margin of safety ratio. Assume current sales are $75,000.
c. Calculate the monthly operating income (or loss) at a sales volume of 5,400 units per month.
d. Calculate monthly operating income (or loss) if a $2 per unit reduction in selling price results in a volume increase to 8,400 units per month.
e. What questions would have to be answered about the cost–volume–profit analysis simplifying assumptions before adopting the price cut strategy of part d?
f. Calculate the monthly operating income (or loss) that would result from a $1 per unit price increase and a $6,000 per month increase in advertising expenses, both relative to the original data. Assume a sales volume of 5,400 units per month.
g. Management is considering a change in the sales force compensation plan. Currently each of the firm’s two salespeople is paid a salary of $2,500 per month. Calculate the monthly operating income (or loss) that would result from changing the compensation plan to a salary of $400 per month, plus a commission of $0.80 per unit, assuming a sales volume of
1. 5,400 units per month.
2. 6,000 units per month.
h. Assuming that the sales volume of 6,000 units per month achieved in part g could also be achieved by increasing advertising by $1,000 per month instead of changing the sales force compensation plan, which strategy would you recommend? Explain your answer.