The following information is available for ABBA Corporation for last month:
Sales (10,000 units x $120 per unit) $1,200,000
Variable expense (10,000 units x $80 per unit) $800,000
Contribution margin $400,000
Fixed Expenses $300,000
Operating Income $100,000
The company has no beginning or ending inventories. ABBA’S product is in its growth stage and is positioned as an affordable quality product. Currently, competitor’s prices range from $110-$124 per unit.
Required:
a) Calculate the company's break-even point in units. (3 marks)
b) The marketing manager believes she can increase sales by 5,000 units by implementing one of these two options:
Option 1: Increasing advertising, a fixed cost, by $50,000, or
Option 2: Decreasing sales price per unit to $115.
Calculate the total operating income under each option above (1) and (2). (4 marks)
Explain which option would you recommend from both a financial and a strategic perspective. (3 marks)
Sample Solution