Olongapo Sports Corporation is the distributor in the Philippines of two premium golf balls- the Flight Dynamic and the Sure Shot. Monthly sales, expressed in pesos ( P), and the contribution margin ratios for the two products follow: Product Flight Dynamic Sure Shot Total Sales......................................... P150,000 P250,000 P400,000 CM ratio .................................... 80% 36% ? Fixed expenses total P183,750 per month.
1. Prepare a contribution format income statement for the company as a whole. Carry computations to one decimal place.
2. Compute the break- even point for the company based on the current sales mix.
3. If sales increase by P100,000 a month, by how much would you expect net operating income to increase? What are your assumptions? Compute the degree of operating leverage at the current level of sales. b. The president expects sales to increase by 20% next year. By what percentage should net operating income increase?
5. Refer to the original data. Assume that the company sold 18,000 units last year. The sales manager is convinced that a 10% reduction in the selling price, combined with a $ 30,000 increase in advertising, would cause annual sales in units to increase by one- third. Prepare two contribution format income statements, one showing the results of last year's operations and one showing the results of operations if these changes are made. Would you recommend that the company do as the sales manager suggests?
6. Refer to the original data. Assume again that the company sold 18,000 units last year. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $ 1 per unit. He thinks that this move, combined with some increase in advertising, would increase annual sales by 25%. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach.