Question:
1. John Jay Company is selling a hardware product with a contribution margin of 40 percent on sales of $500,000 per year (50,000 units at $10). The fixed costs are $80,000 per year.
(a) How much increase in net income is expected in the coming year if sales increase by 10,000 units?
(b) How much increase in net income is expected in the coming year if sales are increased by $70,000?
(c) The sales manager feels that a $20,000 increase in the yearly advertising budget would increase annual sales by $60,000. Should the advertising budget be increased?
(d) The sales manager suggests cutting the present selling price by 10 percent and increasing the advertising budget by $25,000. If these two decisions are made, it is projected that unit sales will go up by 40 percent. Should this policy be approved?