Question: This year Jostens Company earned a disappointing 4.2% after-tax return on sales (Net income/Sales) from marketing 100,000 units of its only product. The company buys its product in bulk and repackages it for resale at the price of $25 per unit. Jostens incurred the following costs this year.
Total variable unit costs . . . . . . . . . . . . . . $1,000,000
Total variable packaging costs . . . . . . . . . $ 100,000
Fixed costs . . . . . . . . . . . . . . . . . . . . . . . . $1,250,000
Income tax rate . . . . . . . . . . . . . . . . . . . . 30%
The marketing manager claims that next year's results will be the same as this year's unless some changes are made. The manager predicts the company can increase the number of units sold by 80% if it reduces the selling price by 20% and upgrades the packaging. This change would increase variable packaging costs by 25%. Increased sales would allow the company to take advantage of a 20% quantity purchase discount on the cost of the bulk product. Neither the packaging change nor the volume discount would affect fixed costs, which provide an annual output capacity of 200,000 units.
Required: 1. Compute the break-even point in dollar sales under the
(a) existing business strategy and
(b) new strategy that alters both unit sales price and variable costs.
2. Prepare a forecasted contribution margin income statement with two columns showing the expected results of
(a) the existing strategy and
(b) changing to the new strategy. The statements should report sales, total variable costs (unit and packaging), contribution margin, fixed costs, income before taxes, income taxes, and net income. Also determine the after-tax return on sales for these two strategies.