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Lecture

March 12.docx

3 Pages
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Department
Business
Course Code
BU121
Professor
Laura Allan

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March 12, 2013 bu121 CVP recap-  When you look at the market as a whole how many percent you would need to cover your cost?  Decide when to change strategy in order to make more money Top Hat Monocle If you were considering a new strategy that would increase your fixed costs by $5000, but decrease your variable costs from $20 to $10 unit on a product with a price of $50, at how many units of sales would this strategy make sense? Correct answer 500 -CFC is 5000 -drop variable cost by 10 -50*10 = 500 Assume: ABC Company currently sells 400 units of a product at $250/unit and variable costs are $150/unit…  contribution per unit = 250 -150 = 100 per unit  total $ contribution = 100/unit x 400 unit = $40 000  contribution margin = 1 – 150/250 =40% If increasing advertising by $10,000 meant that sales would increase by $30,000, would you do it? -you have to run the numbers before deciding Step one -figure out the change in contribution Step 2 Compare to the fixed cost Step 3 Figure out are you better off or worst off 30 000 x 40% contribution = 12 000 additional contribution Vs 10 000 increase in FC It looked like a 20 000 difference but when you run the calculation it is actually a 2000 dollars difference -therefore it is better to do this, but is there any impact to make this decision? -there is not qualitative issues towards this so we can proceed the decision If you could decrease variable costs by $25/unit, but it would mean that quality would also decrease and as a result sales would drop to 350 units, would you do it?  250 – 125 = 125 dollars contribution per unit  X 350 units = $43750 total contribution  Vs $40 000 – additional contribution of $3750  YES, quantitatively  Qualitative issues? (can effect brand, is it worth the 3750 to make this decision) If by paying your sales people a commission of $15/unit you could reduce salaries by $6,000 and increase sales by 15%, would you do it? $250 - 165 = $85 contribution per unit X 460 units = 39100 total contribution Vs $40 000 = 900 decrease in contribution BUT 6000 drop in FC Therefore net effect
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