Naomi Soderstrom sells over-boots for use in wintry conditions. Naomi's products, worn over shoes, provide traction on ice and packed snow, helping prevent falls. Naomi's income for her most recent year of operations is as follows: Revenues (120,000 units X $20) $2,400,000 Variable Costs Direct Materials $480,000 Direct Labor 720,000 Selling and administration 120,000 $1,320,000 Contribution Margin $1,080,000 Fixed Costs Manufacturing $540,000 Marketing & Sales 120,000 General administration 228,000 888,000 Profit Before Taxes 192,000 Naomi believes that while the cost of direct materials and direct labor varies with the number of units, the cost of variable selling and administration expenses are proportional to revenues. Not satisfied with her current profit and 8% return on sales ($192,000/$2,400,000), Naomi wants to improve profits in the coming year. She is considering changing her selling price. If Naomi increases her selling price to $22 per unit, then she expects sales to stay at 120,000 units in the coming year. However, if she reduces her selling price to $19 per unit, then she expects sales to increase to 175,000 units. Regardless of her pricing strategy, Naomi expects next year's costs to be as follows: -Direct material costs to increase by 10%. -Direct labor costs to increase by 5%. -Variable selling and administration costs to stay the same as a fraction of each sales dollar. -Total fixed costs to stay the same at $888,000. Prepare a budgeted income statement for each of Naomi's two pricing choices. What price should Naomi choose?
Paper#6742 | Written in 18-Jul-2015Price : $25