Question 1 - Saldina Hardware is organized into 3 departments. The following sales and cost data are available for the prior year.
Dept A Dept B Dept C
Sales $265,000 $850,000 $900,000
Variable costs 106,000 510,000 720,000
Contribution Margin 159,000 340,000 180,000
Less fixed costs 60,000 85,000 92,000
Profit 99,000 255,000 88,000
Required:
a. What is the weighted average contribution margin ratio?
b. What level of sales is needed to earn a profit of $500,000 assuming the current mix?
c. Saldina Hardware places an advertisement in the local paper each week. All else equal, which department would you emphasize in the advertisement?
Question 2 - Tenneco Inc., produces 3 models of tennis rackets: standard, deluxe, and pro. Sales information for 2015 follows:
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 sale price of deluxe rackets decreases by 10%, its sales are expected to increase 30%, but sales of standard rackets are expected to decrease by 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 standard rackets. This is expected to increase the sales of all 3 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 interest of the company.