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[Drawing]
TOTAL
SALES (1000 TAPE RECORDERS) 400 LESS: Variable expenses 200 Contribution margin 200 LESS: Fixed expenses
Net Income
120000
The above income statement shows that SHABBIR CORPORATION sold 1000 tape recorders as Rs. 400per unit. The per unit variable expense is Rs.200. The fixed expenses of the company is 80000 and net income for the month of august is 120000 .
1.Change in Fixed Cost and Sales Volume SHABBIR CORPORATION is currently selling 1000 tape recorders per month (monthly sales of 400000). The sales manager feels that increase in the monthly advertising budget would increase the sales by 80000 to a total of 1200 units. The following table shows the effect of proposed change in the monthly advertising budget.
[Drawing][Drawing] Difference
Current sales
Sales 80000 Variable expense 40000 Contribution margin 40000 Fixed expenses 20000
120000
140000
The advertising budget should be approved since it would lead to an increase in net operating income of 20000.
2.Change In Variable Cost and Sales Volume According to the original data SHABBIR CORPORATION currently selling 1000 tape recorders per month. The management is now considering the use of higher quality components which would increase variable cost by Rs.50 and there by reduce the contribution margin by Rs.50 per tape recorder. However the manager predicts that it increases sales to 1500 per month. The Rs.50 increase in the variable cost will decrease the unit contribution margin by Rs.50
Expected total contribution margin with higher quality components 1500 tape recorders x 150 per tape recorder = 225000
Present total contribution margin 1000 tape recorders x 200 per tape recorder = 200000
25000
According to the analysis the higher quality component should be used. Since fixed cost will not change, 25000 increase in the contribution margin shown above resulted in increase in net income.
3.Change In Fixed Cost, Sales Price and Sales Volume According to original data the company is currently selling 1000 tape recorders per month. To increase the sales, sales manager would like to cut the selling price by Rs.50 and increase the advertising budget by 40000. The sales manager thinks that the unit sales would increase by 50% (500). Would the changes be made?
[Drawing]
[Drawing][Drawing][Drawing] Difference Sales 36000 V.Expenses 30000 C.M 6000 F.Expenses (10000)
120000
105000
The net income is decreasing by 15000 thats why we cannot make the changes .
4.Change In Variable Cost, Fixed Cost and Sales Volume The company is currently selling 1000 tape recorders per month. The sales manager would like to pay a sales commission of Rs.50 per tape recorder sold, rather than giving flat salary of Rs.10000 per month. The sales manager is confident that the change will increase the monthly sales to 1500 tape recorders.
[Drawing]
Present 1000
Expected 1500
[Drawing][Drawing][Drawing] Difference Sales 200000 V.E (175000) C.M (25000) F.E 10000
120000
155000
5.Change In Regular Sales Price SHABBIR CORPORATION is currently selling 1000 tape recorders per month. The company has an opportunity to make a bulk sale of 500 tape recorders to wholesaler if an acceptable price can be worked out. The sale would not disturb the companys regular sales and the total fixed expenses. The company wants to increase his monthly profit by 50000.
Variable cost per tape recorder Desired profit per tape recorder 50000 /500 tape recorders
200
100
300