Reference no: EM133087959

Question - Barhoom's Cellular (BC) is a distributor and sells phones for $200 a phone. BC gets the phones for $130 each. BC pays the sales staff a commission of 10% for each phone sold. BC's fixed selling & administrative costs total $6,750 per month. Currently, Barhoom sells, on average, 185 phones a month. BC is asking you to:

a. Determine his margin of safety & explain to him what that means.

b. BC is considering spending an additional $650 a month on advertising. BC believes that this will increase his monthly sales by an additional 10 phones. Advise BC on whether they should go ahead with the advertising proposal or not. Show support for your recommendation.

c. BC is considering selling another cheaper type of phone. The new phone has a cost of $80 and will be sold for $150 each. The sales commission policy will apply for the new phone, too. Barhoom expects that out of every five phones he sells two will be from the new one and three from the old one. Barhoom is asking you on how this will impact his breakeven point. Calculate BC new breakeven point.

d. Which phone, do you think, his salespeople would prefer to sell? Is that what Barhoom would also prefer? Explain.