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Information for Drone On Limited is shown below: Per Unit Percentage of Sales Selling price $ 1,150 100 % Variable expenses 690 60 % Contribution margin $ 460 40 % Total fixed expenses are $70,000 per month, and the company is selling 1,400 drones per month
Information for Drone On Limited is shown below:
Per Unit Percentage of Sales
Selling price $ 1,150 100 %
Variable expenses 690 60 %
Contribution margin $ 460 40 %
Total fixed expenses are $70,000 per month, and the company is selling 1,400 drones per month.
Required:
1. The marketing manager argues that a $5,200 increase in the monthly budget to prepare webinars would increase monthly sales by 50 drones. Should the webinar budget be increased?
Yes
No
2. Refer to the original data. Management is considering using higher-quality components that would increase the variable cost by $110 per unit. The marketing manager believes the higher-quality product would increase sales by 30% per month. Should the higher-quality components be used?
Yes
No
Expert Solution
Answer:
1.
| Current | Proposed | Change | |
| Sales | $ 1,610,000 | $ 1,667,500 | $ 57,500 |
| Variable Expenses | $ 966,000 | $ 1,000,500 | $ 34,500 |
| Contribution Margin | $ 644,000 | $ 667,000 | $ 23,000 |
| Fixed Costs | $ 70,000 | $ 75,200 | $ 5,200 |
| Net Operating Income | $ 574,000 | $ 591,800 | $ 17,800 |
Yes, webinar budget should be increased since operating income increases.
2.
| Current | Proposed | Change | |
| Sales | $ 1,610,000 | $ 2,093,000 | $ 483,000 |
| Variable Expenses | $ 966,000 | $ 1,456,000 | $ 490,000 |
| Contribution Margin | $ 644,000 | $ 637,000 | $ (7,000) |
| Fixed Costs | $ 70,000 | $ 70,000 | $ - |
| Net Operating Income | $ 574,000 | $ 567,000 | $ (7,000) |
No higher quality components should not be used, since operating income decreases.
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