Task: CVP Analysis
Technology of the Past (TOP) produces old-fashioned simple corkscrews. Last year was not a good year for sales but TOP expects the market to pick up this year. Last year's income statement was:
Sales Revenue ($4 per corkscrew) $40,000
Variable Cost ($3 per corkscrew) $30,000
Contribution Margin $10,000
Fixed Cost $ 6,000
Operating Income $ 4,000
To take advantage of the anticipated growth in the market, TOP is considering the following courses of action.
1. Do nothing. If TOP does nothing, it expects sales to increase by 10%.
2. Spend $2,000 on a new advertising campaign that is expected to increase sales by 50%.
3. Raise the price of the corkscrew to $5. This is expected to decrease sales quantities by 20%.
4. Redesign the classic corkscrew and increase the selling price to $6 while increasing the variable cost by $1 per corkscrew. The sales level is not expected to change from last year.
Evaluate each of the alternatives considered by TOP. What should they do?