Reference no: EM133057558

Question - The following monthly data in contribution format are available for Rhys Company and its only product, Product SD:

	Total	Per Unit
Sales	$83,700	$279
Variable expenses	32,700	109
Contribution margin	51,000	$170
Fixed expenses	40,000
Net operating income	$11,000

Each of the scenarios are independent of each other.

Required -

1. Management is contemplating the use of plastic gearing rather than metal gearing in Product SD. This change would reduce variable expenses by $18 per unit. The company's sales manager predicts that this would reduce the overall quality of the product and thus would result in a decline in sales to a level of 250 units per month. Should this change be made?

2. Assume that Rhys Company is currently selling 300 units of Product SD per month. Management wants to increase sales and feels this can be done by cutting the selling price by $22 per unit and increasing the advertising budget by $20,000 per month. Management believes that these actions will increase unit sales by 50%. Should these changes be made?

3. Assume that Rhys Company is currently selling 300 units of Product SD. Management wants to automate a portion of the production process for Product SD. The new equipment would reduce direct labor costs by $20 per unit but would result in a monthly rental cost for the new robotic equipment of $10,000. Management believes that the new equipment will increase the reliability of Product SD thus resulting in an increase in monthly sales of 12%. Should these changes be made?