Response to the following problem:
Tenneco, Inc., produces three models of tennis rackets: standard, deluxe, and pro. Following are the sales and cost information for 2011:
|
ITEM
|
STANDARD
|
DELUXE
|
PRO
|
|
Sales (in units)
|
100,000
|
50,000
|
50,000
|
|
Sales price per unit
|
$30
|
$40
|
$50
|
|
Variable manufacturing cost per unit
|
$17
|
$20
|
$25
|
Fixed manufacturing support costs are $800,000, and fixed selling and administrative costs are $400,000. In addition, the company pays its sales representatives a commission equal to 10% of the price of each racket sold.
Required:
(a) If the sales price of deluxe rackets decreases 10%, its sales are expected to increase 30%, but sales of standard rackets are expected to decrease 5%, as some potential buyers of standard rackets will upgrade to deluxe rackets. What will be the impact of this decision on Tenneco's profits?
(b) Suppose that Tenneco decides to increase its advertising by $50,000 instead of cutting the price of deluxe rackets. This is expected to increase sales of all three models by 2% each. Is this decision advisable?
(c) The incentive created by sales commissions has led Tenneco's sales force to push the higher priced rackets more than the lower priced ones. Is this in the best interests of the company?