Suppose that Company A were to offer all customers special rebates as a sales incentive. As a result, assume that sales price would decrease $10 per unit, but that annual sales volume would increase to 150,000 units. Assume that the company's fixed operating expenses would not increase at the higher sales volume level (which may be stretching things a bit). Also assume that its variable operating expenses are all revenue-driven and equal to 15 percent of sales revenue. In terms of the impact on operating profit, would the rebate strategy to increase sales volume be a good trade-off for the company?
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Company A
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Totals
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Per Unit
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Sales volume, in units
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120,000
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Sales revenue
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$24,000,000
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$200.00
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Cost of goods sold expense
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$15,600,000
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$130.00
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Gross margin
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$8,400,000
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$70.00
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Variable operating expenses
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$3,600,000
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$30.00
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Contribution margin
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$4,800,000
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$40.00
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Fixed operating expenses
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$3,000,000
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$25.00
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Operating profit
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$1,800,000
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$15.00
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