Reference no: EM132656055

Your small manufacturing operation has the following information concerning the main product:

Current Situation:

Sales in Units                 3,000

Sales in Dollars            525,000

less: Variable Costs         286,500

Contribution Margin           238,500

less: Fixed Costs             202,000

Operating Income              36,500

Your manager has asked you to prepare operating income estimates for these three following options.

Option 1 = This scenario assumes a 5% increase in sales volume (units) as a result of 20,000 of increased advertising. As well, a $10 decrease in per unit variable cost can be realized as a result of new, automated production equipment. The new equipment will increase depreciation expense by $25,000.

Option 2 = The sales manager believes that a $5 decrease in the sales price per unit will result in a 10% increase in sales volume (units), however, this will need to be accompanied by $30,000 of increased advertising. Assume that the automation described above will be applied in this scenario as well.

Option 3 = If no additional dollars are spent for advertising, the sales manager predicts sales volume will drop 100 units from the Current situation. Assume the same decrease in per unit variable costs, and increased depreciation expense, as option 1 and 2 above.

Problem 1: what are the sales dollar on each option 2. contribution margins Operating income